Global Business Citizenship: A Transformative Framework for Ethics and Sustainable Capitalism

Citation preview

Global Business Citizenship

Global Business Citizenship A Transformative Framework for Ethics and Sustainable Capitalism

DONNA J. WOOD • JEANNE M. LOGSDON PATSY G. LEWELLYN • KIM DAVENPORT

M.E.Sharpe Armonk, New York London, England

Copyright © 2006 by M.E. Sharpe, Inc. All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M.E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Global business citizenship : a transformative framework for ethics and sustainable capitalism / by Donna J. Wood ... [et al.]. p. cm. Includes bibliographical references and index. ISBN 0-7656-1626-2 (cloth : alk. paper) 1. International business enterprises—Management. 2. Social responsibility of business. 3. Business ethics. I. Wood, Donna J., 1949– HD62.4.G535 2006 658.4’083—dc22

2005017676 Printed in the United States of America

The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984.

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Contents —————— ————

Preface Acknowledgments

ix xv

1. An Invitation to Global Business Citizenship Linking Ethics to Business Practice Globalization and the New Pressures on Managers Countervailing Forces The Promise of Global Business Citizenship

3 4 6 8 12

2. What’s Wrong with the Status Quo? Systems Are More Complex and Turbulent Firms Face More Threats . . . and Opportunities Managers Are Caught in a Vise Capitalism Itself Is Threatened The Promise of Global Business Citizenship Conclusion

15 17 19 21 24 30 31

3. The Lens of Global Business Citizenship The Concept of Citizenship Making the Leap from Individual to Business Citizenship Three Approaches to Citizenship Comparing Views of Citizenship The Process of Global Business Citizenship Guidelines for Implementing GBC Conclusion

34 34 36 40 45 46 48 53

4. Principles, Codes, and Policies: The Guidance System for Global Business Citizenship Organizational Guidance Systems

55 55

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CONTENTS GBC Requires a Small Set of Comprehensive Universal Principles Universal Principles and Ethical Relativism What Are “Universal” Principles? Codes of Conduct: What’s Covered? Codes of Conduct: Temptations and Dilemmas What Does a GBC Code Look Like? Designing for Buy-In The Biggest Mistakes in Codes of Conduct Conclusion 5. The Principle of Accountability and Processes of Stakeholder Engagement Accountability: An Overview Stakeholder Engagement Which Stakeholders Need to Be Engaged? How and Where Do We Engage Our Stakeholders? Basic Approaches to Stakeholder Engagement More Complex Approaches to Stakeholder Engagement Stakeholder Engagement for Large-Scale Social Problem-Solving Making Stakeholder Engagement Work 6. Cases in Implementing GBC Stakeholder Engagement Implementing Stakeholder Engagement Employee Stakeholder Engagement: Calcados Azaléia S/A, Brazil Supplier Engagement: Hewlett-Packard Local Community Engagement: Holcim and Union Cement Public-Private Partnerships: Volvo and Göteborg Multi-Sector Collaboration: Vietnam Footwear Industry Collaborating on the Hardest Stuff: AngloGold Ashanti and Danfoss Group Stakeholders Matter Conclusion: Implementing Can Be Fun 7. Building the Citizen Company: The Principles of Organizational Change (Nice Theory, But Will It Work?) Definitions, Levels, Principles How Does Change Occur? The CHANGE Model Why Do Some Change Efforts Fail? Conclusion

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59 61 62 68 70 74 77 79 82 83 84 86 88 93 95 95 97 101 102 102 103 105 108 110 111 115 119 119 120 121 123 133 137

CONTENTS 8. Organizational Change the GBC Way: Cases in Implementation What’s Different About GBC Implementation? What Makes a Problem Easier or Harder? Merging the GBC Process and the Change Process: Examples from Global Compact Cases Conclusion 9. The Practice of Accountability: GBC Measurement and Reporting GBC Reporting Goes Further Reporting Then: An Historical Perspective Reporting Now: A Current Perspective Accountability Tools: An Internal Focus Accountability Tools: An External Focus Challenges of Accountability Reporting Conclusion: Memo to Global Business Citizens

141 142 143 145 162 164 165 166 169 171 174 182 182

10. Cases in Implementing Stakeholder Accountability Implementing Stakeholder Accountability Compliance and Local Adaptation: Beauty Essential Co., Ltd. Compliance, Conflicts, and Tool Development: Royal Dutch Shell Experiment in Monitoring and Transparency: The Gap Interface, Inc.’s Sustainability Reporting Conclusion: Accountability Processes

183 183

11. System-Level Learning and the Payoff in Reputation Knowledge Management and GBC Learning System-Level Learning How Does a GBC Company Learn? What’s the Link from Accountability and Stakeholder Engagement to Learning? Benchmarking: How GBC Firms Learn to Learn Reputation, Image, and Identity the GBC Way Conclusion

197 197 199 200

12. The Promise of Global Business Citizenship GBC for Managers and Their Companies: Themes Revisited GBC Payoffs: Why Global Business Citizenship Makes a Difference

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184 185 186 190 195

201 202 204 211 213 213 214

CONTENTS The Old Rules No Longer Work Is It Too Late to Self-Regulate? Power Imbalances and the Need for Self-Regulation Problems to Watch Out For In the End, a New Beginning Notes Bibliography About the Authors Index

219 220 221 222 223 225 233 243 245

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Preface —————— ————

Globalization is perhaps the most challenging development of modern times. It has pushed the stark economic contrasts of poor and rich nations to center stage. It has weakened nations and governments without creating a replacement institution to look out for the public good. It has revealed both the astonishing successes and the destructive impacts of capitalist business. In the last two decades or so, few other topics have commanded more attention worldwide. We have all learned a great deal about multinational corporations, balances of trade, tax havens, transfer payments, economic development, sweatshops and child labor. We’ve learned about cross-border political conflicts, immigration patterns, ethnic and cultural minorities and majorities, unstable or indifferent or corrupt governments. We’ve learned about multilateral efforts to contain the disruptions of globalization, such as the World Trade Organization and the Kyoto Protocol on Global Warming. Through the magic of video, the Internet, the business press, and the efforts of global NGO participants, we’ve also seen the human faces of globalization. We’ve seen busy young executives in Prague and Guang-Zhou; we’ve watched efforts to merge cultures as the European Union expands and consolidates; we’ve worked along with the trash-pickers of Indonesia and the cocoa plantation workers of Côte d’Ivoire; we’ve mourned with Texas workers as their factory moves to Puerto Rico, and we’ve celebrated the arrival of new jobs with the Puerto Ricans; we’ve learned about the call center workers as well as the basket weavers of India. We’ve watched the native peoples of central Africa suffer from the horrible effects of river blindness, curable by a single oral dose of a Merck medication, and we’ve seen their wide-eyed gratitude when help arrives. We’ve watched the pride and amazement on the faces of Bangladeshi college graduates supported by Grameen Bank. We’ve felt the suffering of AIDS victims who have no access to the medical treatments

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PREFACE that could ease their pain, and we’ve learned about company efforts in Africa to get appropriate help to HIV-infected employees. What can we make of all this raw information, all these faces, all this new hope and deep despair? Globalization Is Inevitable, But Its Outcomes Aren’t Most people who write about globalization are taking sides for it or against it. We are keenly aware of the pro and con arguments, though we aren’t enthusiastic about them. For example, some maintain that globalization is the ultimate “rising tide” that will bring opportunity and prosperity to all the world’s peoples. Others claim that globalization is the ultimate greed-grab of corporations that care only about their own profit. Some believe that globalization will result in industry monopolies and the consequent death of capitalism; others suggest that globalization offers entrepreneurial wealth-building for anyone and expands the realm of economic possibility. Some propose that businesses are good “corporate citizens” and that this will only get better with globalization; others point out that “corporate citizens” are not enacting duties but are voluntarily participating in community affairs, and that their support can be withdrawn at a moment’s notice. Some argue that global companies have no grounds to be “citizens” in any meaningful way; others argue that if they do have such grounds, it can only spell trouble for democracy and human well-being. We acknowledge these claims and arguments, but we have a different take. We don’t think it matters a bit how anyone feels about it—globalization is an implacable, unstoppable process. We do think it matters a great deal, however, that business leaders and managers understand the processes of globalization and the crucial role they themselves play in shaping its directions and consequences. Most of the nay-sayers in the globalization discourse are frightened or furious about the current visible abuses of human capital in the service of financial capital. They believe that globalization leads inevitably to giant corporations that assume the powers of government and then use those powers to further their own ends rather than the public good. Given all that we have learned about global business in the last 25 years or so, it is not hard to see why this view is so prevalent and powerful. Our view, though, is different; and it is not a view that unduly praises the corporation and its capitalist environment. We believe that globalization can yield the very best that capitalism has to offer—rapid innovation, technological progress, rising quality of life, more choices for all, equal opportunity to share in society’s benefits, and equal protection from its harms. And

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PREFACE most importantly, following decades of study of the political, legal, social, and ethical environments of business, we are convinced that it will be businesses themselves that lead the way to a new negotiated order, a widely accepted set of standards on human rights, labor conditions, the environment, corruption, and economic development. We are not arguing that this should happen; we are arguing that it will happen. Global business citizenship, we argue, is the right way for managers and companies to steer their own courses through these rocky shoals of globalization. Global business citizenship is the path to sustainable capitalism, bringing innovation and wealth creation to all. In this book we lay out our argument, present the evidence, and examine the available tools and the efforts already underway. We ask you, the reader, to walk with us in the hope that globalization will not destroy the many benefits of capitalism, but that capitalist enterprises will do what is needed to sustain an environment in which they—and everyone else—can thrive and profit. A Note on Language You might find the language of this book to be a bit more breezy than the ordinary business text. We use some colorful metaphors and even tell a few jokes. We have done this on purpose—to get your attention and keep it as we develop some very important ideas. We are all perfectly capable of writing pedantic scholarly prose. But we are serious about wanting you to read this book and think about how to apply its messages in your organization, so we have written it more as a conversation than a lecture. Enjoy! Themes and Levels of Analysis Table P.1 illustrates how the book’s major themes are presented and discussed over three levels of analysis—the individual, organizational, and systemic levels. This table is your roadmap through the many topics and tools in the book. You’ll see that not every topic in every cell is included systematically in the book, but we’ve offered the complete matrix of ideas so you can see how and where the book’s themes and messages can be pushed further. For the most part, we have focused most heavily on the organizational- and individual-level themes. There is so much that individual managers and specific organizations can do to steer the processes of globalization toward sustainable capitalism—and our goal is to encourage you, inform you, and stand beside you as you see how this can happen in your life and your company.

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xii 2, 3, 4

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The GBC process gives firms a hybrid strategy.

2, 3

Trust is essential, but easily lost.

Ethics and values make a difference in business.

1, 2

Chapters

The status quo isn’t so great.

Themes

Individual

Personal character: Most managers aren’t evil and want to do the right thing. Ethics belongs in business decisionmaking and action.

Trust makes life easier for managers. To keep trust alive, agreements must be kept, duties fulfilled, and expectations met.

Managers are stuck in a performance vise with too many challenges and responsibilities; they feel trapped and powerless; faced with fear, uncertainty, doubt.

Themes and Levels of Analysis

Table P.1

Organizational

GBC—global business citizenship—offers a hybrid strategy for firms to help them be trustworthy on standards, adaptable in implementation, systematic in their learning. (Ch. 3)

Organizational guidance: Vision, mission, values, principles, codes, and policies all help a firm’s employees develop and use good ethical judgment. (Ch. 4)

Trust lowers transaction costs and earns social capital for the firm. To keep trust alive, stakeholders must be satisfied.

Firms face ever-harder competitive pressure in a more complex and turbulent environment. Bad actors in the global economy—the ruthless rule-breakers—are hard to rein in.

Systemic

Institutional enforcement: Law, regulation, courts, and even industry selfregulation can and do support ethical conduct for individuals and organizations, for thebetterment of societies and institutional systems.

Trust makes the social system possible. To keep trust alive, institutions must permit and support its fulfillment by persons and organizations.

Problems abound within and across nations: shrinking governments, crossborder economies, massive poverty, a growing divide between rich and poor, violence, environmental degradation.

PREFACE

Applying these tools to GBC promises to change the status quo.

We already have the tools for achieving nation-level GBC benefits.

11, 12

5, 6, 7, 8, 9, 10

xiii For people, and especially managers: A better and more moral life, a sense of efficacy, a solid reputation, and an ability to learn and grow. (Ch. 11)

Personal tools: Buy-in, commitment, courage; the language of rights, duties, and justice; management communication and authority channels; peer support; knowledge of planning and decisionmaking.

For companies: A good reputation based on earning stakeholders’ trust; the creation of sustainable businesses; the possibility of competitive advantage; and organizational learning. (Ch. 11)

Organizational implementation tools: • Stakeholder engagement (Ch. • 5, 6) • Organizational development • and change management (Ch. • 7, 8) • Accountability and • sustainability reporting (Ch. • 9, 10)

For the globe: Global business citizenship is the path to sustainable capitalism, to bringing innovation and wealth creation to all. (Ch. 12)

Systemic tools: Stakeholder activism; investor/customer pressures; supranational regulatory agreements; stable civil institutions.

PREFACE

PREFACE The Bottom Line Sit back, relax, and enjoy the flight. Then put on your superhero gear and get out there and save your own corner of capitalism. Adopting the principles and processes of global business citizenship is something that any manager can do, any corporation can do, and any industry can do. Stay with us for the why and the how.

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Acknowledgments —————— ————

We owe a large debt of gratitude to all the managers, companies, government agencies, nonprofit organizations, and supranational bodies that have been actively trying to think through the issues of global business citizenship and experiment with solutions. Getting a book like this from concept to conclusion involves a number of key players besides the authors. We certainly thank Harry Briggs, the executive editor at M.E. Sharpe, as well as Elizabeth Granda, Amy Odum, and Carmen Chetti, who designed a number of our graphics. Over the course of our research we have had numerous wonderful student assistants who have tried to keep us sane and organized. Kim Parker earns a special thank you for managing the permissions process and other extraordinary efforts. All of us want to thank our dear friends and colleagues Steve Wartick and John Mahon for their unflagging support despite skepticism about our core idea of global business citizenship. We thank the Sloan Foundation and our program officer, Gail Pesyna, for a seed grant that got us going on this work. In addition, funding for a mini-conference on the topic of global business citizenship was provided by chaired professorships at the University of Northern Iowa, the University of New Mexico, and the University of Maine, held by Wood, Logsdon, and Mahon, respectively. Donna wants to thank lifelong mentors, students, friends, and family for all the usual reasons. Her position at the University of Northern Iowa, the David W. Wilson Chair in Business Ethics, provided significant financial support for the project as well as a fabulous work environment. Imagine—a workplace where everybody’s got your back! Donna dedicates her contributions to this book to her two sons, Jacob and Sam Wood-Bednarz, and to her “adopted” mom, Lois O’Connor. Jeanne expresses appreciation to the deans and her department chairs in the Anderson Schools of Management at the University of New Mexico for

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ACKNOWLEDGMENTS encouragement and research support in writing about global business citizenship over the past five years. She especially values the contribution by Jack and Donna Rust to create the Jack and Donna Rust Professorship in Business Ethics, which has provided financial support to write this book. She thanks her MBA and Executive MBA students for providing vibrant discussions about how to design practical ethical approaches to complex business situations. Jeanne dedicates her contributions to the book to her husband, John E. Young. Patsy is grateful for research support from the University of South Carolina Aiken School of Business through the John M. Olin Chair in Enterprise Development. She thanks her family and friends for their patience and unfailing support, and her students and colleagues for stimulating and challenging her thinking on the subject of business citizenship and accountability. Patsy dedicates her contributions to this book to her husband, Ron Lewellyn, and their daughter Casey. Kim is appreciative of her educational experiences at the Gestalt Institute of Cleveland, American University (the AU/NTL program), and the Fielding Institute—they each shaped her view of the world in profound ways. Kim thanks AT&T, BellSouth, and First Data Corporation for providing exceptional career opportunities to learn and grow. Kim dedicates her contributions to this book to her family for modeling a strong work ethic, compassion, and treating people fairly. Finally, we each want to acknowledge our teammates on this project. Good work is always fun, but good work with great colleagues is simply the best.

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Global Business Citizenship

h1g

An Invitation to Global Business Citzenship —————— ————

“You want me to do WHAT???” For today’s manager, just getting through the workday can be tough enough. The pace is implacable; there is extraordinary pressure for performance in a risky, turbulent, globalizing environment. This requires difficult trade-offs and good explanations for the paths taken and not taken. Dangers loom large, and rewards sometimes seem distant. Increasing demands and higher risks, decreasing time and head count, hypercompetition, and always the pressure to meet earnings projections—all these challenges can make many managers’ lives something less than truly satisfying. Scared yet? You should be. Yet fear can be a friend if it steers us away from disaster. A wise and courageous person is not unafraid. Now add in new demands for stakeholder accountability, global social responsibility, ethical conduct, and transparency, spurred in large measure by globalization and communications technology. Then consider how much weaker many governments have become in regulating conduct for the safety and well-being of citizens, both individual and corporate. Next, contemplate the vast economic and social inequities among the world’s nations and the derivative threats and opportunities. Finally, reflect for a moment on what all this might mean for your work life, your chances of having a happy retirement, and the prospects for your children and grandchildren. If you’re like most managers, you face competing stakeholder demands, you’re up against ethical problems regularly, and you may lack a framework or a language to address them. Like people anywhere, managers are selfinterested and concerned for others. They want to do good and they are very

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CHAPTER 1

Exhibit 1.1 What Is a Global Business Citizen? A global business citizen is a business enterprise (and its managers) that responsibly exercises its rights and implements its duties to individuals, stakeholders, and societies within and across national and cultural borders.

practical. They have big dreams and irksome constraints. Herein lies the biggest dilemma of modern global management. The good news is that most people—managers certainly included—want to do the right thing. The desire for ethical conduct and ethical treatment is built into the fabric of human character. The bad news is that so far there has not been a good template for incorporating ethics and responsibility into the fabric of management practice—at least not a model that the average manager feels can be “worn out of the store” and put into action. This book offers you a beacon through the fog surrounding responsible management practice via the process of global business citizenship—a new way of thinking about ethical and responsible global management. In practical terms, we want to help you negotiate the rapids of the social, cultural, and political change that accompanies globalization. We want to give you good reasons for making the effort to do the right thing every day in every way. We offer a framework for seeing that ethical, responsible business practices transcend cultural and religious boundaries, and that such practices are good for the firm and good for business as a whole. The global business citizenship process will help you design your organization and your worklife in a more sustainable—and personally sustaining—way. Linking Ethics to Business Practice Here’s a little quiz to test your motivation to manage ethically. You leap out of bed in the morning and go off to work, thinking with great enthusiasm: A. Hey, I’m going to do a lot of good for a lot of people today! B. Maybe I’ll get lucky and won’t have any big problems today! C. Wow, this looks like a great day to exploit some workers! Sure, there are some “immoral” or sociopathic managers, the ones who look for new ways to cheat, lie, and steal, and who don’t seem to care who

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gets hurt in the process. We see their handiwork in some of the big scandals and disasters of the corporate world. And there are some managers who thoroughly infuse their business practices with deeply held religious or philosophical principles—the founding executives at Johnson & Johnson or Levi Strauss might come to mind. In the middle, however, are the managers who lack the awareness, the vocabulary, or the framework for relating what they believe is right to what they believe is necessary in business.1 Not having good tools can make even the best-intentioned manager frustrated, ineffective, and distrustful. These “amoral” managers do have values, and typically very good ones. But for a variety of reasons, those values are difficult for the managers to apply to and implement in business practice: • They may separate their private behavior from their business behavior, believing that business is a “game” with its own rules and that “reallife” rules do not apply. • They may be afraid for any number of reasons to raise ethical issues, to expose problems, or to champion social responsibility. • They may not be sufficiently tuned into the long-term and broad-based consequences of business decisions, focusing instead on the narrow, short-term performance goals that are familiar and comfortable. • They may lack the analytical skills, the experience, and the vocabulary to conduct ethical analysis alongside economic or technical analysis. • Responsibility and accountability in organizations are so often diffused across levels and functional silos; the process of how work actually gets done often “hides” any real sense of control or impact for managers. So, if you find yourself among or reporting to or supervising that large middle of “amoral” managers, how’s that workin’ for ya?2 Here are just a few examples of the difficulties that managers have stumbled into for lack of skill—or will—to act upon values they already hold: • A young engineer hesitates to tell his boss about a design problem he believes can lead to great customer harm; he is afraid of his boss’s temper, or he just doesn’t know how the information will be received. And he is concerned about what his expression of concern might mean to his own job security. • A CPA is told by her managing partner that her client demands that his gambling wins and losses not be recorded on his personal tax return, even though the law requires reporting. It’s a wash; there’s no tax liability anyway, so what’s the problem?

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CHAPTER 1 • A federal contracts manager is told by superiors that if prototype testing doesn’t entirely pan out, he should “smooth the curves” on the report to avoid raising questions about potential product limitations. • Threatened with job loss if her unit doesn’t cut costs, a manager chooses to overlook safety violations and routine maintenance of security systems. • A newly minted MBA is promoted too fast. Flattered, he fails to see that he has been chosen because he is inexperienced and will be set up as the fall guy if the major corporate fraud is discovered. • Forced to downsize, a manager is tempted to place older employees on the lay-off list, given they lack “runway” potential. Almost all of the thousands of managers we have met intend to do the right things for their families, communities, employees, and companies, as well as for themselves. They mean to cause no harm, and they feel good about helping those in need. They obey the law (most of the time) and keep a wary eye out for those who don’t. They participate in community affairs and societal governance, and they “give back” in gratitude for what they have been given. In short, they are good folks. But—and isn’t there always a ”but”—the new realities of global business are presenting managers with problems and dilemmas they never dreamed about. It’s more than the common (and false) wisdom that business and ethics are unrelated—it’s a whole new world of challenges for the manager. Globalization and the New Pressures on Managers The pressures on managers haven’t changed so much because of globalization, but they have become much more intense and time-constrained. There are huge pressures to ensure company financial performance and success. There are equally strong pressures for individual managers to get good evaluations, bonuses, and promotions, enabling them to experience personal success. But managers today are between two worlds in terms of knowing how to achieve these goals. What worked well 10 or 20 years ago doesn’t work so well anymore; the standards of success for the organization and individuals may be similar, but the paths to achieving them are not clear. New stakeholder expectations and processes for meeting them are not yet well defined. It may seem at times unrealistic to expect ethical conduct of oneself, much less of colleagues, business partners, and competitors. Indeed, in some situations, it seems impossible to even understand what the right course of conduct is. Consider these examples:

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• Marlene arrives in Haiti where her company contracts with a local supplier who subcontracts with small manufacturers. She meets with the supplier’s senior executives and requests a final schedule of the previously arranged tours of production facilities. She is told that unfortunately, because of local flooding, the facilities are undergoing renovation and cannot be toured at present, and she is then urged to approve the anticipated three-year supply contract quickly, before competitiors move in to appropriate the supplier. • Stefan from Internal Audit at headquarters discovers that his company’s Pakistani chemical factory is surrounded not by the required buffer zone, but by makeshift neighborhoods of workers and their families living in shacks of tin and cardboard. Following the plant disaster in Bhopal, India, in the mid-1980s, Stefan’s company developed detailed standards to prevent exactly such an occurrence. He finds, however, that local plant managers, workers, and officials seem to have only a vague awareness of Bhopal or of the company’s safety standards. • Jim has been sent by his company to a Middle Eastern country where he is to investigate some new business opportunities. After settling into his hotel, he decides to take a walk. Within a few blocks he comes upon a woman being assaulted by a group of men. He tenses, looks around for help, and finding none, moves to intervene. As he steps in to offer assistance, Jim is grabbed by two of the men and soon realizes that he is being arrested. His passport is taken and he spends the night in jail, missing an important business meeting. Released the next day with stern warnings not to interfere with local Islamic law, he must explain to his boss and ask for guidance. Most managers are familiar with the language of costs and benefits, and are typically able to decide which of several courses of action is economically best for the firm. But what can a firm-centric economic analysis tell us about how a manager should behave in situations like those above? Instead, the broader ethical language of harms and benefits, voluntary versus involuntary participation, rights and duties, just processes and fair distribution is required. • Marlene has to be aware that the supplier may be trying to manipulate around her company’s express desire to uphold workplace safety and labor standards. Will she offend the local supplier if she refuses to sign until the inspection has been done? What will happen to the subcontractors’ workers if her company cuts its ties with the supplier? What if she signs, and the subcontractors are exposing their workers to very hazardous chemicals?

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CHAPTER 1 • Stefan is faced with implementing headquarters standards in a situation that is, in utter contradiction, both unthinkable and locally acceptable. He knows all too well what happened at Bhopal, but if no one at the Pakistani plant seems to know or care, how is he going to enforce required safety standards? What if he enforces the standards strictly and is accused of cruelty to poor workers just looking for a place to live? What if he lets things slide and a major disaster occurs? • Jim has landed in a theocracy that throws into immediate clarity his own cultural beliefs and assumptions about individual freedom, equality, and rights. Everything in his character tells him to stand up for vulnerable people, to oppose abuse and violence, and to respect the values and beliefs of other cultures. Nothing in his management education has prepared him, however, for the experience of legal, socially accepted violence against women. Without breaching his own integrity, how can he conduct business in a culture where such customs assault his sensibilities? Each of these managers is experiencing a clash of values, beliefs, and practices that has the potential to cause great harm to vulnerable stakeholders. There is also the possibility of creating great good—but how is that defined, and by whom? The problems here are ethical, and therefore require a shift in language and an adeptness and comfort level that managers already have with traditional business analysis. Global managers know they have an obligation to abide by legal and ethical principles, and they ordinarily want to do so. But how often do the ethical problems involved appear to be too confusing and perhaps insurmountable, because of competing pressures? Standard guidance is reflected in the adage, “When in Rome, do as the Romans do.” But when is the “when-inRome” approach appropriate, and when should it be rejected? What should the firm’s relationship be to various types of governments? How many managers have a clear reading of their stakeholders’ interests and of the consequences of their daily business operations? The global business citizenship process offers answers and—more importantly—ways to evolve to next year’s answers, not just today’s. Countervailing Forces Sure, there are opportunists who can make big bucks today by exploiting human suffering and using the world’s poor as expendable labor units. There are those who can make a killing by manipulating small corners of global financial markets. There are those who feel free to trade in toxic wastes,

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putting entire regions at great risk in the absence of any governmental or supragovernmental oversight. In the short term, it might indeed benefit these people to be crooks and scoundrels as long as they don’t get caught. We are convinced, however, that most managers do not want to live their lives as opportunists, manipulators, thieves, or agents of environmental destruction. Quite the opposite, in fact—most managers we know would like to ensure a legacy of opportunity for their children and a reputable name for themselves. They want their lives and their efforts to count for something important, and they want to retire with dignity and financial security. All of these high-value objectives are at great risk in a world where opportunism reigns. But what can one person or one organization do in the face of intense pressures for consistent short-term growth in market share, revenue, profit, stock price? What are the countervailing pressures to act responsibly, and how strong are they? In the modern world of instant communication, there’s no place to hide—but is anyone watching? Government as Regulator A significant source of control of business opportunism3 in democratic societies is government. Traditionally, its roles include being a guarantor and enforcer of citizens’ rights and privileges as well as a provider of the institutions and infrastructure necessary for business to thrive. Within industrialized nations, there are many cases in which stakeholder and public concerns have been addressed via the legislative and regulatory apparatus of the state. In some cases, government intervenes in business affairs to favor and support a particular industry or set of businesses.4 But in large measure, democratic government involvement has emerged to sustain business enterprise and all the public benefits it provides by correcting market failures of inefficiency, externality, and inequity.5 Antitrust law is an example of enhancing market efficiency by strengthening competition through prevention of monopoly, industry-wide pricefixing, and other anti-competitive practices. Insider trading prohibitions are another example of efficiency-related regulation. Adam Smith’s capitalist theory assumes that investors have complete access to information that could materially affect a firm’s valuation. In practice, however, we know that information is sometimes parceled sparingly to the popular press and thus to the ordinary investor, and we know that brokers, fund managers, bankers, and a host of other financial professionals have private access to material information before anyone else does. Therefore, laws and regulations to prohibit insider trading are meant to improve market efficiency by forbidding

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CHAPTER 1 those “in the know” from acting first to buy or sell stock that is rising or falling, before the general public is aware of the information. Laws and regulations correcting for externalities are intended to reduce harms to involuntary stakeholders or to society as a whole. For example, pollution control regulation restrains the ability of an upstream papermill to dump toxic wastes into the river. If this behavior were not regulated, the toxics would eventually kill the fish in the river, harming the fisheries downstream (involuntary stakeholders of the papermill) as well as destroying any collective benefits such as clean water the river provides to the entire society. Finally, inequities occur in market transactions when there are big differences in people’s access to information, opportunity, and bargaining power. Adam Smith’s theory of market competition assumes that consumers have full information about products and services so that they can evaluate which is best for them and choose accordingly. In practice, however, sellers have information that they don’t want to share voluntarily, for example, the actual miles per gallon or kilometers per liter that a vehicle gets in normal use, or the true rate of interest to finance a purchase. Therefore, laws and regulations are meant to reduce the market contract inequity by requiring that relevant and timely information be provided to customers. Government Regulatory Failure For at least two decades, there has been a trend in many industrialized democratic nations toward less government, fewer restrictions on business, and more reliance on markets to correct themselves. To those who really believe in capitalism, this trend raises serious questions—not because government waste is a good thing (it isn’t!), but because government plays several vital roles in creating an environment where the best that business has to offer can thrive. The question is how to find the optimal balance between freedom of action and control of market abuses. Globalization trends have added to the difficulty of governments to adequately control the excesses and failures of capitalism while nurturing its many benefits. National governments cannot easily regulate businesses when capital, goods, information, and even labor flow so freely across borders. Too many nations feature weak, corrupt, or oppressive government officials who are more interested in private graft than the public good. Supranational institutions that would foster sustainable capitalism6 are nonexistent or barely emergent. Meanwhile, business power and influence have grown tremendously, alongside increasingly unacceptable inequities in wealth distribution, access to education, human health and welfare, use of technology, and life opportunities in general. These inequities and power asymmetries have

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AN INVITATION

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Exhibit 1.2 Stakeholder: Any person, group, or organization who can affect or is affected by the organization’s actions. Traditionally, a company’s stakeholders include investors, employees, customers, suppliers, and local communities. Others—governments, NGOs, activists, the media—are also considered stakeholders today. For the earliest popular discussion of business stakeholders, see R. Edward Freeman’s book, Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984).

always existed, but in modern times they are contributing to a dangerously unstable world.7 Accountability to Stakeholders To some extent, stakeholder groups serve as regulators of global business conduct. In many ways, NGO and market-based stakeholders are better able than governments to intervene in undesirable business behavior. No corner of the globe is without satellite communications, and thus visibility and multidirectional knowledge transfer are virtually immediate. On the one hand, this can make it much easier for a business to coordinate its activities and to increase its efficiency. On the other hand, it makes every business activity more broadly transparent and more instantly vulnerable to massive stakeholder pressures. Customer stakeholders can be mobilized in a flash to buy certain goods or avoid certain others, based on non-economic values and objectives. Employee stakeholders are able to compare their situations with those of their peers around the world. NGO stakeholder groups like Greenpeace, Human Rights Watch, or OxFam now have virtually instant knowledge of incidents related to their concerns, and they have rapid communication tools permitting real-time crossborder organization and action. Thus, the visibility ensured by modern global communications lessens the control that business organizations can exert over their image, identity, and reputation, and raises the stakes, encouraging managers to pay stricter attention to the stakeholder impacts of their actions. Firms and Their Managers The fact is, in the absence of effective national and supranational governance of business’s social and political impacts, firms and individual managers by default take on greater responsibility and a greater monitoring role for

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CHAPTER 1 their own actions and with each other. Every business needs to internalize a bigger sense of responsibility for creating and sustaining a stable world, a “level playing field” for capitalist enterprise, a baseline of dignity and opportunity for all people, a greater respect for the natural environment. These are not merely stretch goals; they are becoming the system norms that make it possible for capitalism to thrive in the long term—to be sustainable well into the future. For those who believe that capitalism is the best system for economic welfare, these goals are imperatives. “But It’s Not My Job!” So true—you aren’t getting paid the big bucks to reform the world. So whose job is it to make sure that globalization doesn’t cause more harms than benefits? Whose job is it to help your organization prosper in a bewildering environment? Whose job is it to be responsible for the impacts as well as the productivity of your department or function? Okay, maybe it is your job, and theirs, and ours too. We want to help you think differently about individual responsibility for business citizenship. So how, in this morass of confusing messages, can managers make good judgments? The Promise of Global Business Citizenship This book provides practical and thought-provoking guidance on the ethical challenges of managing global business. By global we do not mean strictly cross-cultural, although many of the examples we use in the book involve doing business across borders. One of the many intriguing features of globalization is that it has crystalized ethical conflicts and contradictions by expanding the range of behaviors to which people are exposed, forcing us all to view the extremes of human conduct and to experience empathy for previously unknown or unnecessary suffering. Along the way, each of us is exposed to values, beliefs, and practices different from our own. Some of them are intuitively appealing; some violate our sense of fairness or our belief in human dignity. Greater cross-cultural awareness has allowed people all over the world to uncover many hidden assumptions of their own cultures, and to question whether those assumptions actually support human welfare. This means, however, greater turbulence and uncertainty for managers. Managers are responsible for an enormous range of business decisions and are accountable to a number of individuals, groups, and organizations, who expect and demand different outcomes. Some of managers’ responsibilities seem clearly governed by legal standards and the judicial process, others by market conditions, political processes, or ethical and community

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norms. But often the governing mechanism isn’t simple and clearcut. The long-term consequences of short-term decisions can come back to haunt companies in liability judgments, regulatory burdens, failed reputations, and ultimately profitability declines and threats to survival. To top it all off, the daily problems of managers are now global as well as local, cross-cultural as well as intra-country, and correspondingly difficult to grasp and to solve. “Muddling through” is not satisfactory; the stakes are much higher, the issues deeper, and the players so diverse. Standards of behavior and performance, and their enforcers, are less clear, often contradictory, or even nonexistent. Conflicts have become the norm, a particularly difficult situation for those well-meaning managers who prefer consistency and predictability in order to do their jobs well, be successful, and enjoy a good life. In this book we offer you the process of global business citizenship (GBC), a conceptual approach to identifying principles of ethical management and then applying them concretely and with cultural respect. The GBC process requires: 1. a set of fundamental values embedded in the corporate code of conduct and in corporate policies that reflect universal ethical standards (sometimes called hypernorms8); 2. implementation throughout the organization with thoughtful discovery of where the code and policies fit well and where they might not fit (say, because of changing social expectations or local cultural variations); 3. analysis and experimentation to deal with problems of fit, conflicts, and contradictions; and 4. formal, systematic processes to organize and communicate organizational performance and the specific results of implementation and experiments in order to facilitate learning both within the organization and for its stakeholders and other organizations. Our goal is to support executives and functional leaders in making good choices by offering a clear rationale for citizenship behavior and a practical set of analytical and implementation tools. To do this, we use the language of business citizenship and a variety of examples from traditional business issues as well as extraordinary social and environmental problems, and we examine how business leaders can rely upon good principles and implement good practices for managing across borders and cultures. We want to encourage and empower you, and to increase your understanding of how capitalism can sustainably meet its promise of wealth creation and just distribution. The theory and practice of global business

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CHAPTER 1 citizenship provide, we believe, the best path currently available to help managers solve many of these challenging problems. GBC gives managers a lens to clarify the nature of problems, a compass to point toward sustainable global capitalism, and a machete to maneuver in the global jungle. Even more importantly, GBC offers a logical, practical framework for addressing social responsibility and ethical problems in a way that allows managers to manage intentionally with integrity—to meet your business obligations and maintain self-respect, to pass the profitability and the frontpage tests, to act upon your best intentions, and to work toward your noblest dreams. We are walking with you on this journey. We invite you and your company to become global business citizens, and to learn how social responsibility and ethical conduct can be embedded in your firm’s daily practices and decision-making processes. We give you good arguments about why this path is best for you, your company, and your society. We encourage you to look at the imperatives of global strategy and the trap of ethical relativity in a new way. We urge you to think big about what capitalism means, what it has to offer, and what threatens it. Equally, we will help you stay grounded in the real daily problems and opportunities of managing ethically and responsibly in a chaotic global environment. In short, GBC is theory and practice with promise. Stay with us to learn the theory, observe the practice, and think about applications in your own company. We believe that you will come to a new and more effective understanding of the impacts and opportunities of globalization. You will see that global business citizenship offers a promise of capitalism in full flower, to the greater benefit of all.

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h2g

What’s Wrong with the Status Quo? —————— ————

Some days and for some managers the status quo seems mighty fine. Just getting through the workday without disaster is a major accomplishment. It is natural, and certainly understandable, that managers might resist one more “new idea” that promises greater organizational and personal success, but requires a lot of change to make it happen. It can seem too hard to embrace a new way of thinking about doing business that accepts greater ethical obligation and more responsibility for the results of business decisions. But there are good reasons for managers not to be satisfied with the status quo of business values and practices. The changes taking place in today’s world are profound, and they open up new worlds of risk and opportunity. Managers, their firms, and their industries all are facing challenges never before imagined, and even capitalism itself is under siege. In this chapter we’ll briefly examine the modern business environment in terms of the challenges and threats it holds for social systems, companies, managers, and capitalism. Then we’ll explore how the path of global business citizenship changes the view—from the thickets and thorns of ordinary practice to the inspiring vista of a better life in a better world. Why spend time struggling with cultural value clashes when you could just apply headquarters’ standards everywhere the company operates? Why worry about worker safety or pollution problems in countries that don’t seem to care themselves? Why even try to keep jobs in the home country when customers apparently want ever-cheaper products? Competition to grow and to keep market share can be so tough that it’s often difficult enough just to maintain the status quo, much less improve on it.

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Exhibit 2.1 Levels of Analysis In this book we lean pretty heavily on something the social scientists call “levels of analysis.” We want to explain this device so you won’t feel like we’re jumping all over the place as we talk about the global economy, societies, industries, companies, and individual managers. The main idea of “levels of analysis” is that at any particular point we are focusing on a particular kind of entity—an individual, a company, a group of companies in an industry, a national economy, a cross-border economy, the world society. Each kind of entity represents a portion of the human experience, and each has attributes that are unique to it. A society, for example, can’t be “motivated” like an individual can be; an organization can have goals but an industry ordinarily wouldn’t. Going from the other direction, we can see that world society necessarily contains much diversity of belief and action, but individuals usually seek a certain degree of consistency between their beliefs and their actions. There are many ways to think about “levels of analysis,” so here we’re going to review just four of the main categories that we use— individual, organizational, systemic, and suprasystemic. You’ll easily be able to spot the level we’re operating on—language such as “you,” “your company,” “this society,” or the “global economy” will tip you off. Individual level of analysis: We’re always aiming to reach you, the reader, the manager. We want to address the problems you face and offer you encouragement and motivation to walk and talk the GBC path. At the individual level we are concerned with perception and awareness, interpretation, decision and action, and consequences as they involve you personally, as a human being. Organizational level of analysis: We know, though, that you don’t do business all by yourself. You are most likely working in a company—a collection of people, perhaps a great many people—which can make your life infinitely more complex. So, we focus also on organizations, their structures and processes, their challenges and decision-making methods, their outputs and outcomes. Systemic level of analysis: And we know that neither you nor your firm could do business if there weren’t institutional structures such as a functioning economy, government and a rule of law, an educational system, and a “voluntary sector” or set of organizations devoted to fun, enlightenment, service, meaning, and all the other things that people do. Normally we’ll be working at a systemic level when we talk about the social, political, and economic institutions within societies. Suprasystemic level of analysis: These institutions, made up of organizations and individuals and their actions, form a tremendous overlapping network that we might think of as “society” or, at a more complex level, “global society.” When we talk about “capitalism,” for example, we are usually working at the suprasystemic level, thinking about the institutional structures and processes of capitalism across and regardless of borders.

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Systems Are More Complex and Turbulent Complexity and turbulence are words that organization theorists love to use. Their meaning is simple, though dealing with them is not. In any system under observation: Complexity is the number of units and the relationships among them; Turbulence means simply the rate and volatility of change. Theorists make predictions about how organizations will structure themselves under different conditions of complexity and turbulence. For example, in a simple, placid environment, one might expect a business to . . . well . . . Okay, these ideas were developed in the 1950s, when there might have been such a thing as a simple, placid business environment. In today’s world, there’s no such thing. Instead it’s rapid, often unpredictable change, along with complicated, shifting networks of relationships and transactions. The manager’s task is to try, try, try to keep the effects of complexity and turbulence from spinning out of control. It’s a monumental challenge. Global Competitive Pressures Are Ratcheting Up the Pace of Change Technological “creative destruction” has always threatened mature industries and their steady stream of revenues and profits. But now the high-growth technologically advancing industries, like software and information processing, are moving through the product life cycle much more rapidly. It’s almost no joke that this year’s pricey miracle gadget is next year’s loss leader at the local electronics supermarket. And in virtually all industries, the search for cost reduction strategies is pushing companies to use suppliers from far-flung parts of the globe or to set up their own plants there. Next year these business arrangements may become less competitive, so there will be new pressures to renegotiate and relocate. More People Can Play, and Interdependencies Are Tightening In current iterations of physics’ chaos theory, the flapping of a butterfly’s wings in Taipei can eventually result in a tornado in Kansas.1 The reality of intricate patterns of global interconnectedness is unmistakable. In current global economics, Tom Friedman has written compellingly about the vast interdependencies among nations, cultures, and industries. In fact, he defines globalization in terms of interconnection: the inexorable integration of markets, nation-states and technologies to a degree never witnessed before—in a way that is enabling individuals,

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CHAPTER 2 corporations, and nation-states to reach around the world farther, faster, deeper and cheaper than ever before.2

In the introduction to his book, The Lexus and the Olive Tree, Friedman illustrates this definition by exploring the causes and effects of the 1997–98 Asian financial meltdown. Thailand’s private banks closed abruptly when the Thai government was unable to maintain a fixed currency exchange rate. Frightened capital flew out of other Asian lands, causing a crash in global commodity prices, including oil, which caused Russia to default on its highinterest bonds, which caused global hedge funds to sell off liquid assets to pay their own debts, which crashed other successful emerging markets such as Brazil, which caused extreme volatility in U.S. Internet/tech stocks, which. . . . But you get the idea. Globally, interdependencies are tightening, and this cannot help but change the way business operates. Societal Needs That Affect Business Are Increasing Everywhere, but Many Governments Seem Less Able or Willing to Address Them Populations are growing and increasingly are concentrated in urban areas. Basic infrastructure is crumbling in many industrialized nations, and it is vitally needed in the developing world. For example, access to clean water is threatened in many urban areas that lack sewage systems and waste treatment plants. Roads and bridges need to be built or replaced. Social needs, such as education, health care, police and fire protection, and old age security, need to be provided. Net job loss exacerbates pressures on governments because tax revenue falls and government expenditures rise. In the last two decades of the twentieth century, a worldwide trend could be seen toward reducing the size and importance of government. There are good arguments to be made for reducing government waste, of course, but it is possible to go too far. There are some tasks in the collective interest—including the interests of the business institution—that are simply handled best by a wellfunctioning government. As governments worldwide are weakened, no other institution is able to step into the breach. This creates challenges for businesses that thrive when conditions are lawful, safe, and politically stable, and where regulations ensure that all businesses play by the same rules. Global Stakeholder Groups Enforce Demands At the same time as governments have lost much of their power to meet public and business needs, stakeholder expectations of businesses have ratcheted up more than a notch. Global communications make it possible for

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corporate scandals and disasters to be seen instantaneously, with all the attendant pathos and emotion. Naturally, the media do not favor the “happy news” of corporate successes in improving social welfare by raising standards of living, preventing child and forced labor, improving drinking water supplies, or lobbying for government acceptance of basic human rights. Instead, the public learns about sweatshops, plant explosions, oil tanker accidents, destruction of valuable environmental resources, and more routine commercial practices that can spread harm to vulnerable populations. It’s no wonder, then, that global stakeholder groups have sprung up in the wake of business’s globalization. Rising stakeholder concerns and expectations have materialized in a variety of ways. Boycotts and consumer actions, long a staple of consumer protection groups, now have the potential to circle the globe in a flash, as market leader Nike, Inc. discovered in the late 1990s when it was targeted by global human rights and religious groups. Environmental protection and human rights interest groups make use of the Internet, cell phones, and fax machines just as business executives do, and they can mobilize an attention-grabbing demonstration, a powerful lobbying campaign, or a proxy resolution drive in mere hours. Labor unrest in developing nations, such as Malaysia, the Philippines, and Indonesia, has grown, expressed in human rights language, though this sometimes comes as a surprise to companies that have settled in these countries in part because of the “quiet” and subordinate behaviors of labor. Even if these activist stakeholders have little direct influence on the corporation, they are often able to convince core stakeholders—customers, suppliers, employees, stockholders, and other capital providers—that the company must address the group’s concerns or face serious consequences. Investors supporting socially responsible investing have become a permanent legitimate segment of the shareholder community, accounting for over 11% of professionally managed portfolios in the United States in 2003. Approximately US$2.14 trillion is invested in socially responsible funds and initiatives, according to the Social Investment Forum. The rapid growth in social investing is astonishing: this figure is up from US$640 billion in 1995 and from only US$65 billion in 1985.3 Firms Face More Threats . . . and Opportunities Competitors Play Hardball on an Uneven Playing Field There are vast differences in the quality of life as well as the cost of living among the countries and regions of the world. Great efficiencies in transportation and communications have made it possible for manufacturing facilities to

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CHAPTER 2 locate profitably in developing areas where the workforce is trainable and eager to work for low wages. Resulting changes in nations’ balances of trade put stress on developed economies because of the flight of skilled and semiskilled jobs and consequent loss of income. It simply isn’t possible for an American or European or Japanese worker to survive on 30 cents an hour, but this is the nature of the competition from developing regions. In addition, the larger the company, the more able it is to put downward pressure on the prices it pays its own suppliers. Wal-Mart is by no means the only example; in fact, General Motors started the trend toward squeezing suppliers in the early 1980s. This trend is a happy one if you’re working at Wal-Mart or GM, but if you’re one of their thousands of small and mid-sized suppliers, your life could become more and more miserable. Cultural Differences Are Confusing Lack of clarity about which cultural differences are critical to an organization’s success, which threaten it, which are irrelevant, and which are problematic makes decision making complicated. Local managers may know the best way to satisfy local concerns, but they must defend their decisions to distant regional or central headquarters personnel who don’t understand local norms and customs and who are focused on company-wide goals rather than local harmony. It is even more challenging when those distant regional or central headquarters executives must make the decisions and local managers must implement them, whether or not these decisions are consistent with local values and practices. Short-Termism Is Rewarded Publicly held companies have yet another challenge that their privately owned competitors do not face. Stock markets seem to resonate to promises of smooth growth in revenues and earnings from quarter to quarter. The reward is growth in stock price. Analysts and brokers expect their targets to be met or exceeded, and a company’s stock can be trashed if those targets are missed. These pressures encourage short-term thinking on the part of executives. Creating revenue for next quarter becomes more important than sustaining the enterprise for the next twenty years. One well-known way to boost a company’s stock price is to lay off a substantial percentage of workers. Remember the consultants’ admonition to become “lean and mean” as a response to global pressures? So often, however, it’s not “dead weight” that’s being cut, but productive workers who make contributions that simply can’t be covered by the remaining workforce. Such short-termism can boost this quarter’s stock price, but at a very high cost in years to come.

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There are even cases where the top management team has decimated the workforce, piled up debt and spent cash on acquisitions and reorganizations, and boosted the stock price just in time to cash out their options and move on. What’s left behind? A quivering fragment of a formerly good company, without the necessary resources to meet the challenges of the future. Big Corporations Aren’t Trusted Too many large firms have reputations for unethical and irresponsible behavior. Sometimes these reputations are deserved, and sometimes not. But the costs of a bad reputation can be quite high. The demise of Arthur Andersen is an extreme example. A reputation for integrity is essential for public accounting firms, so the rapid loss of clients after its association with Enron and indictment for destruction of documents triggered dissolution of the firm. Cynicism about big business increases with headlines about extraordinary executive compensation and board cronyism. Mutual funds are under scrutiny for giving a few clients (or their own managers) preference in trading to earn a better return on their accounts. Other clients are deciding to move their funds. The scandalous falls of Parmalat in Italy and of Ahold in the Netherlands generated massive ripples among the European Union and its trading partners. Anyone who has read just a bit of business history knows that scandals come and go, and that some time periods—particularly those with minimal or no government oversight—are more inviting of fraud. We seem to have hit one of those time periods in the late 1990s and early 2000s. A consequence has been a huge decline in the public’s willingness to trust businesses and their managers. Without trust, can an economy and its companies thrive? Managers Are Caught in a Vise The ever more complex global business environment offers new twists on the old management problem of simultaneously meeting multiple goals. Now there are more goals, set by more stakeholders with louder, more persistent, and more insistent voices, who work effectively together with the media to exert worldwide pressure. Too often, stakeholder expectations conflict, and managers are left to figure out which way to react to minimize damage to their organizations and their own careers. Pharmaceutical companies, for example, must manage conflicting demands of shareholders and analysts for profits, and the expectations of world health organizations and activists who advocate the donation of drugs to developing-world populations suffering from HIV/AIDS and other virulent diseases.

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CHAPTER 2 Figure 2.1 The Manager’s Vise

Stakeholder Expections

Stockholder Expections

Ethical conduct Environmental protection Employee rights to decent work conditions Transparency Accountability Dialogue Collective benefits Reduced harms Fairness Going beyond regulatory compliance

Make the numbers Keep growing Increase stock price Short-term earnings Wall Street pressures Institutional investor demands

The short story here is that the modern global manager is operating in a vise, with the pressures of financial analysts and stockholders and the countervailing pressures of other stakeholders threatening to crush him or her at any moment. Risks for Poor Decisions Are Higher than Ever Or at least they seem to be. Word gets out much faster with electronic communications systems available everywhere. Competitors know a lot more about your business and aren’t far behind in taking advantage of wrong decisions and delays in meeting commitments. Media reports get to corporate critics and shape public opinion much more quickly than in the past. Accountability—and blame—are reaching both up and down the corporate structure. Pressure on managers is up, and job security is down. Short-Termism Is Rewarded Here Too Achieving “the number” for projected earnings targets or growth in market share is the primary goal for corporate leaders because the consequences of

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not achieving “the number” can be dire. Financial analysts may downgrade the stock, and investors will sell if they can find a more attractive investment. Managers who own stock worry about the value of their portfolios, and employees fear job layoffs and budget cutbacks. Corporate directors are beginning to ask unnerving questions about the quality of executive leadership and may “clean house” if the top management team does not produce as expected. It is naïve to think that executives will be able to forego achieving “the number” for very long when such consequences are clearly detrimental to their interests. There’s a Crisis of Confidence in Management Integrity The crisis of confidence in business integrity reflects very personally on managers themselves. After the high-tech bubble that raised stock prices to an all-time high in the late 1990s, the twenty-first century opened to a long series of enormous business failures and scandals resulting from fraud, conflicts of interest and self-dealing, over-the-top “innovation” in financial instruments and tax dodges, and top management team arrogance—all nurtured by ineffective corporate governance. Jeff Skilling, Andy Fastow, Bernie Ebbers, Dennis Kozlowski, and members of the Rigas family are names permanently associated with white-collar crime and unethical dealings. Enron, Arthur Andersen, WorldCom, Tyco, HealthSouth, Ahold, Adelphia, and Parmalat are just a few of the companies that lost economic value, reputation, and, in the case of Arthur Andersen, its very existence due to ethical failures. And the consequences to their many stakeholders have been grave—from job losses and demise of employee retirement funds to suppliers left with bills outstanding to brown-outs and political crisis in California and elsewhere. Investors seeking high returns at reasonable risk found instead a yearslong pattern of falling stock prices and market turbulence. The public policy arena has given investors little more than patchwork band-aids like the Sarbanes-Oxley Act of 2002 in the United States.4 Meanwhile, Wall Street brokerage and investment banking firms, including Merrill Lynch, GoldmanSachs, Citibank, and J.P.MorganChase, were charged with manipulating stock market valuation by coaxing or coercing false research reports and by essentially bribing top executives with unduly favorable investment opportunities, loan terms, and so on. They agreed to pay $1.4 billion to settle the charges and “get this behind them.” In this climate, investors are frightened and angry, and many are demanding dramatic changes in corporate governance and public policy oversight. Furthermore, managers who have been glorified as great wealth-creators are

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CHAPTER 2 now doing hard time in prison! How can confidence be restored in the integrity of top management and the market system? How can managers avoid the terrible personal consequences of a giant misstep? How to Manage/Juggle Relationships for One’s Own Career? Adding to the stress of the manager caught in the vise is worry about how to manage internal relationships to keep one’s job, earn bonuses and stock options, and get promoted. Fitting into the corporate culture may require compromises with one’s personal values, and temptations abound to keep quiet and “go along to get along.” How can businesses and managers convince people that they will do the right thing? It is essential to build trust, and to do so as rapidly as possible. Building trust means convincing stakeholders that you consider their welfare and take responsibility for the consequences of your decisions. It means acting on bigger and more lasting concerns than profits at any cost. More stockholders need to step up to the plate, as some institutional and individual investors are now doing, and agree that this is also in their long-term best interests. It also means enforcing higher standards of individual executive conduct to eliminate self-dealing. Managerial discretion, influence, and autonomy are bound to shrink if individual executive and business behaviors continue to focus on immediate self-interest and short-term financial performance at the expense of other legitimate stakeholder objectives, including the long-term objectives of environmental sustainability and a life of dignity and opportunity for everyone. The short-term focus is too subject to the opportunism, fraud, and exploitation that destroy trust or prevent it from forming in the first place. Focusing on sustainable business value, on the other hand—the way of global business citizenship—is the way to create trust in a turbulent world and thus to enhance managers’ positive influence. The performance vise is not going to disappear, of course. But there will be more room to develop adequate and ethical responses to the range of pressures that managers face if stakeholders have greater confidence in executive integrity and business responsibility. Capitalism Itself Is Threatened There is an even greater danger, however, than losses to individual managers and companies. Indeed, the greatest threat to capitalism itself may be apathy by business leaders in dealing with legitimate stakeholder needs and expectations. The enemies of capitalism are also the enemies of satisfying

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Figure 2.2 Managerial Influence

Status Quo

GBC

Distrust Short-term focus

Trust Sustainable value

organizational performance and of a life well-lived. Fundamental to sustainable capitalism are socioeconomic questions about the nature of the capitalist institution and sociopolitical questions about who gets what and who controls business behavior. To these questions we now turn. The Ideal Is of Wealth, Autonomy, and a Good Life for Anyone Capitalism thrives in a great many circumstances. It is an adaptive system of innovation, production, distribution, and wealth creation, able to tolerate wide variations in political regime, socioeconomic and demographic profiles, natural resources, cultural patterns, and ethical values. It is egalitarian in the sense that its rewards are not limited to an aristocracy or a chosen few, but are available to anyone who can generate surplus value and leverage that value to grow a business. The Reality Is a Widening Gulf Between Rich and Poor A fundamental criticism that business has to address is who benefits and who suffers from global business activities. The current reality of global capitalism often appears to be skewed toward widening gaps in wealth, dependent upon exploitation of the poor and the earth’s resources. Its leaders too often exhibit a head-in-the-sand approach to human rights and environmental abuses. These are the very problems that could ultimately bring capitalism down by providing evidence that plays into the hands of charismatic extremists of many persuasions or by forcing imposition of controls that reduce the freedom essential for successful long-term capitalism.

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CHAPTER 2 Today a great gulf divides those who believe that capitalism offers the best hope for humanity and those who believe that capitalism is the most powerful barrier to achieving human welfare and enlightenment. On the side of democratic-capitalist enterprise are those who make a moral argument— not a purely self-centered one—based upon the “greatest good for the greatest number” (utilitarianism) and individual human rights. Adam Smith argued long ago that the free pursuit of self-interest eventually yields the highest level of collective economic welfare. On the other side, as Tom Friedman has so vividly illustrated, there are people who believe that capitalist societies are by definition shallow, exploitative, and morally bankrupt.5 Some of those others are incensed that intense poverty in the developing world supports first-world wealth. Others are filled with fear that their way of life is being destroyed, and this fear has been turning to rage. Global business is not seen by them as a provider of all things good and desirable, but as a vessel of Satan that rips apart traditional beliefs and ways of life as emphatically as a Boeing 767 rips apart a skyscraper. And some know that capitalism and its attendant values will erode their personal power bases and deprive them of the wealth, power, and privilege they enjoy at the cost of others’ dependence and suffering. Business leaders cannot ignore these deeply held beliefs and power structures if they want capitalism to thrive. Capitalism Requires Stable Environments and a Rule of Law Global businesses benefit from stable political and social environments. Political stability can be achieved for awhile via dictatorship, military control, or foreign intervention, but these modes are not inherently stable and eventually spawn revolution, sabotage, terrorism, and other threats to social order. As capitalism spreads, moral values and citizenship behaviors play a significant role in creating needed stability. The rights and privileges of citizenship attach to duties, and these duties also must be claimed by businesses. This language of rights and duties is the language of ethics as well as citizenship. It is a language that connects disparate human activities into an interdependent global web of cause and effect. Aristotle, writing of citizenship long ago, developed three essential duties of the citizen: participating in the political process, paying taxes, and defending against enemies of the state and its people. Business citizenship, similarly, involves active participation in defense against threats to capitalism as well as assertive rethinking of how to bring the capitalist dream to all the world’s peoples.

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Sustainable Capitalism Requires a Base of Human Rights and a Healthy Natural Environment Capitalism operates best in fulfilling its promise of providing the highest level of human welfare when it fosters human freedom, opportunity, and dignity within a strong community. At least, that’s what its supporters and beneficiaries think. Economists know that capitalism works best when individuals can act freely and with full information within a system that protects individual property and other rights. Individual liberty and economic welfare work together.6 There’s a lot to be said for capitalism’s ability to raise living standards, nurture innovation, demand better and broader education, and open up opportunities for individuals. As religions scholar Huston Smith tells it, the ideals of capitalism are simple and Semitic: things of the world are so good, everybody should have more of them!7 This is the ultimate capitalist ethic. It is not an ethic of greed or of winner-take-all in every market, but an ethic of widespread economic welfare. In order for this to happen, humans need to be free and able to choose, and there must be a rule of law where all have equal access. It is not an accident (though neither is it inevitable) that capitalism thrives in democracies; it is not an accident that so many of the world’s peoples long to participate in the American, Canadian, or European economy. So—if the issue is that the “haves” keep the “have nots” from having, then an overt and rapid transformation of the world’s economies that is coupled with compassionate and citizen-like corporate behaviors in all local arenas might go a long way toward convincing people worldwide that capitalists are not the merciless exploiters, rather that capitalism is the path to more and better material goods, that democracy and personal liberty are the necessary companions of capitalist satisfaction, and that religious values need not be threatened by universal political and economic freedom. Governments Are Too Weak to Provide What Capitalism Needs Another major question that managers must ponder is this: What will they have to do in order to get the freedom to operate? A first cut at answering this question is “obey the laws wherever you do business” because of national sovereignty. But more is required than legal compliance to meet stakeholder expectations today. National sovereignty has a long and important history in global organization, and a nation’s legal requirements play a significant role in shaping how companies do business. Many examples can be found to show that minimum

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CHAPTER 2 legal requirements have improved the operations of markets and the behaviors of firms. However, just doing what the law requires and allows is not enough to meet ethical expectations for at least three reasons. One reason is that, even in the most democratic and responsive countries, the law-making process is typically slow and subject to many competing interests and differing cultural norms. Legal requirements are often compromises to limit the costs of complying with new rules rather than guidelines for optimal business performance. Legal standards and regulatory requirements can differ considerably, so that a company operating in many jurisdictions faces a confusing array of local rules. Another reason is that capital and information now flow so freely across borders that national sovereignty can no longer be much of a force in shaping business operations. If a company doesn’t like one nation’s legal or regulatory requirements, it can usually find another place to incorporate or operate. Local laws can even become less protective of human beings and the environment, in a perverse “race to the bottom” when developing nations are competing for any share of the economic benefits of the developed world. A third reason is that too often national sovereignty has provided cover for dictators, thieves, and local warlords to have their way with a traumatized population. The United Nations has occasionally intervened—as in Somalia, Rwanda, Bosnia, and Liberia—to override national sovereignty rights with concern for the welfare of citizens and minority populations.8 But more often, national sovereignty has prevailed even in the face of mass starvation, tribal vendettas, and “ethnic cleansing” aka genocide. When the government is corrupt, or powerless, or over-powerful, the law will be ineffective in achieving the stable environment in which capitalist enterprise thrives. It is clear that compliance with local law does not serve as sufficient guidance for multinational enterprises. And, in the absence of a supranational government, and with declining power available to national governments, business itself has to take on a self-governing aspect. There is a long history of industry self-regulation, with varying degrees of enforcement, visibility, and accountability, so this is not a new phenomenon.9 In the global environment, as in other complex and turbulent environments, self-regulation is coming to be accepted as the best way to create a stable business environment and to ensure that all parties play by the same rules. As Virginia Haufler observes in her study of industry self-regulation, there are several factors that seem to yield greater efforts to self-regulate: a high risk of government regulation at the national or international level; relatively low economic competition but high asset specificity; high probability of transnational activist pressure; reputation as a key asset of the

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company or industry involved; and high levels of information exchange, learning, and consensus within the industry.10

Business self-regulation is indeed a way of asserting “a public role for the private sector,” the title of Haufler’s book. The concept of global business citizenship, as we shall see shortly, articulates a political and social rationale for business self-regulation and shows how businesses can be full participants in achieving a better life for all the world’s citizens. Business Will Have to Fill in the Gaps Business can begin to assume its citizenship role by moving away from the slick, superficial “we’re just here to make a buck” image it often cultivates. Business needs to claim its true identity, to redefine itself as the powerful institutional force it already is. Then it can undertake the mighty task of proving to the world’s peoples that “capitalism is best, it leads to greater happiness, it respects human rights, and it ultimately makes justice possible.” Consequently, every business organization is a member of a powerful transformative global institution, and every manager therefore has certain responsibilities with respect to the world’s well-being. The conflicts between owner-stakeholder value and other-stakeholder value and between business and ethics are false dichotomies.11 Today’s global economic environment has less room for the externalization of costs onto innocent third parties and increasingly supports the activism and influence of a multitude of stakeholders. There is strong evidence that a link exists between poor financial performance and irresponsible management practice.12 Stakeholder expectations regarding business’s responsibilities for the “triple bottom line”13—financial, social, and environmental—are increasingly focused on every firm’s contributions to sustainable development and long-term value creation. Capitalism Requires Public Support The developed world is being called upon to live up to its ideals. Business must either stop standing in the way or become a much more active supporter of positive change. The “we don’t do politics” response just won’t work as a defense against self-regulation, ethical conduct, and involvement in citizenship; we know far too much now about business’s deep and abiding involvement in political matters that interest and concern them. We believe that our business leaders are much better than this, much more capable of guiding the world toward a better future by doing what they do

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CHAPTER 2 best—conducting normal business operations. But there’s a catch: The aim of business organizations is not to make as much money as possible, but to make as much money as they can within the limitations of ethical conduct, guaranteed human rights, environmental protection, and other legitimate expressions of individual and collective interest. Business leaders must play a role because of their brainpower, control of resources, and global reach. Global business citizenship has a dual purpose: to make the world safe for capitalism, and to make capitalism safe for the world, its people, and the natural environment. This means promoting choice— allowing people to reap the appropriate rewards from their work; allowing people the freedom to develop as much as they choose to; allowing people to live in dignity, no matter what their particular circumstances. The Promise of Global Business Citizenship The predominant realities of the manager’s status quo—increasing interdependence and higher risks of making poor decisions—take on a new urgency in light of threats to the very existence of capitalist freedom to operate. There isn’t much that can reduce the momentum of increasing interdependence, except for disaster scenarios that need to be avoided. But the good news is that the risks of poor decision making can be reduced. Global business citizenship provides a template for grasping the big picture of business’s role in creating a desirable future for the organization and all its stakeholders. And it illuminates the vectors that begin in complex problems and lead to systematic solutions. That is, GBC offers both a theoretical lens and a practical toolbox to managers trying to grapple with the difficult problems of citizenship and ethical conduct in an unsettled world. A bit of good news about the status quo: We see the beginning of such activities in industries that rely on developing nations for their natural resources or their semi-skilled labor. Market leaders in apparel, sports shoes, and several other consumer goods areas have begun to forge coalitions with human rights organizations to monitor suppliers and enforce codes of conduct designed to protect workers from abuse and exploitation.14 We will learn about some of these efforts in upcoming chapters. There is also considerable attention throughout business communities to global codes of business conduct. The United Nations Universal Declaration of Human Rights and the Rio Declaration have become more than dusty documents of idealistic rhetoric. The United Nations Global Compact, launched in late 1999, is gathering at least the rhetorical support of hundreds of global firms. The Global Reporting Initiative (GRI) is enrolling more firms each year to report publicly about their social and environmental performance

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in addition to their economic performance. Even the Millennium Development Goals—a hugely ambitious set of objectives for ending world poverty and environmental degradation (see Exhibit 2.2)—have the attention of world business leaders participating in the International Business Leaders Forum (IBLF), sponsored by the Prince of Wales. How can businesses make a difference? Here are the domains of action suggested by IBLF participants: Most companies have some impact on development and can make a contribution in the following spheres of influence: • Their core business activities—in the workplace, the marketplace, and along the supply chain; • Their social investment and philanthropy activities; and • Their engagement in public policy dialogue and advocacy activities.15

This, too, is how global business citizenship works—in normal business operations, in stakeholder relations and charitable giving, in interactions with government, and in attempts to influence public policy. Conclusion The principles of global business citizenship are addressed to the millions of managers who would prefer to work for long-term gains and a real chance at meaningful success. In order to be sustainable, the global business institution and its member-companies must and should identify and implement policies to promote ethical conduct, to ensure basic human rights, to protect the environment, and to move toward social justice and collective well-being, wherever businesses operate. This has to be done with due consideration for cultural differences and with ultimate respect for common humanity. Global business citizenship helps managers resolve these issues, and it allows for the irrevocable reconciliation of ethics and business. Fundamental to sustainable capitalism are socioeconomic questions about the nature of the capitalist institution, sociopolitical questions about who gets what, who has power and who should have it, and philosophical questions about what defines “the good life.” GBC can be a vessel that holds what is good and true about capitalism, as well as what is good and right for human beings and the earth. It is necessary because capitalism cannot thrive and spread its many benefits around the globe if its advocates and practitioners do not satisfy the multiple legitimate claims of stakeholder groups, especially in support of human rights and sustainable development.

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CHAPTER 2

Exhibit 2.2 The Millennium Development Goals As the 21st century began, the United Nations adopted a set of objectives to dramatically improve the quality of life worldwide by the year 2015. Signatory nations committed to provide annual contributions of 0.17 percent of GNP toward meeting these objectives. Based on the fundamental values of freedom, equality, solidarity, tolerance, respect for nature, and shared responsibility, the Millennium Development Goals are as follows: 1. Eradicate extreme poverty and hunger • Reduce by half the proportion of people living on less than a dollar a day. • Reduce by half the proportion of people who suffer from hunger. 2. Achieve universal primary education • Ensure that all boys and girls complete a full course of primary schooling. 3. Promote gender equality and empower women • Eliminate gender disparity in primary and secondary education preferably by 2005, and at all levels by 2015. 4. Reduce child mortality • Reduce by two thirds the mortality rate among children under five. 5. Improve maternal health • Reduce by three quarters the maternal mortality ratio. 6. Combat HIV/AIDS, malaria and other diseases • Halt and begin to reverse the spread of HIV/AIDS. • Halt and begin to reverse the incidence of malaria and other major diseases. 7. Ensure environmental sustainability • Integrate the principles of sustainable development into country policies and programmes; reverse loss of environmental resources. • Reduce by half the proportion of people without sustainable access to safe drinking water. • Achieve significant improvement in the lives of at least 100 million slum dwellers, by 2020. 8. Develop a global partnership for development • Develop further an open trading and financial system that is rulebased, predictable and non-discriminatory. Includes a commitment to good governance, development and poverty reduction—nationally and internationally. (continued)

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• Address the least developed countries’ special needs. This includes tariff- and quota-free access for their exports; enhanced debt relief for heavily indebted poor countries; cancellation of official bilateral debt; and more generous official development assistance for countries committed to poverty reduction. • Address the special needs of landlocked and small island developing States. • Deal comprehensively with developing countries’ debt problems through national and international measures to make debt sustainable in the long term. • In cooperation with the developing countries, develop decent and productive work for youth. • In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries. • In cooperation with the private sector, make available the benefits of new technologies—especially information and communications technologies. Source: http://www.un.org/millenniumgoals/ (accessed January 23, 2005).

The need for leaders in global business citizenship, although building for decades, has never been more apparent or more urgent. Global business citizens recognize that the most serious threats to capitalism are failures of liberty, human rights, and civil justice, as well as environmental degradation. It seems clear that peace and prosperity can never be established in a world where liberty is the privilege of a few and justice is available only to some. A new ethic must emerge, one that builds upon the obvious interconnections and similarities among the world’s peoples and that harnesses the drive and innovativeness of capitalism. Global business citizens can lead in these and their own initiatives by learning how to orient their business operations to support freedom and justice, and by serving as exemplars within their industries. Stay tuned for the theory of global business citizenship.

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CHAPTER 3

h3g

The Lens of Global Business Citizenship —————— ————

Citizenship is a very big idea. For many centuries, philosophers, government leaders, and ordinary people have thought about what citizenship means, what it should accomplish, how it works, and to whom it applies. Corporations often claim to be “good citizens,” and stakeholders typically want them to act as good citizens. But what does this mean, especially now in the global economy? Our task in this chapter is to show you how the concept of citizenship for individual persons can be translated to citizenship for business organizations, and how the local and national arenas of citizenship can be expanded to incorporate new global realities. A global business citizen is much like an individual in terms of expectations at home and when traveling, working, and living in other countries. The ultimate aim of a theory of business citizenship, grounded in political theory, is to illuminate the structural and moral ties among business organizations, human beings, and social institutions, and to offer guidance on the rights and responsibilities accruing to business organizations in the global environment. In practical terms, a good theory makes it more likely that business practice will be effectively guided by citizenship principles. The Concept of Citizenship In simple terms, citizenship relates to the particular status of membership in a political unit. For example, one is a citizen of Buenos Aires, Argentina, or the nation of South Africa, or Cook County, Illinois, or the European Union. Citizenship typically involves certain protections that are based upon rights guaranteed by the political and legal constitutions of the polity. Most such

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Exhibit 3.1 What Is a Global Business Citizen? A global business citizen is a business enterprise (including its managers) that responsibly exercises its rights and implements its duties to individuals, stakeholders, and societies within and across national and cultural borders.

rights involve freedom from interference and freedom from harm. For example, in the United States the Constitution has a Bill of Rights that specifies rights of the citizens to freedom of speech, freedom of assembly, and the right against self-incrimination, among others. Citizens are likely also to have duties. Israeli citizens, for example, are obliged to serve in the military, and in most polities, citizens have a duty to pay taxes. At the local level, rules about when rights and duties apply to the citizen are determined by the polity. For example, in the United States you have the right to vote at age 18, and the duty to register for military service at age 18, but you have the right to representation at trial at any age. There is considerable debate and justifiable concern over the question of whether businesses—or any other organizations—can be “citizens” in the same way that people are. First there’s the issue of rights and who—or what— has them. Should corporations in constitutional democracies have the same rights to, say, free speech as individuals do? Do corporations deserve the same rights of noninterference, for example, or freedom from harm? Isn’t there something different, and special, about the status of human citizens? Then there’s the question of duties. If citizens have a duty to pay taxes, shouldn’t corporations, if citizens, also pay taxes? Should they be able to shelter their income in tax-free zones abroad in order to avoid paying taxes at home? Most importantly, there’s the issue of political participation and power: is it fair that large corporations so greatly exceed the ability of human citizens to influence the direction of government? On the other hand, isn’t it fair that corporations should have a voice in the public policies that affect them? We do not mean to discount these questions by calling them legalistic, but indeed they are, and can be resolved only by legal statutes, judicial decisions, and cultural norms. In our globalized economy, though, national laws are insufficient, and international laws are in their infancy. So, we want to call attention to a way around this problem in the absence of a coherent international legal framework: the idea of business organizations as secondary citizens.

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CHAPTER 3 It very often serves human purposes to treat organizations as ongoing entities with independent goals and legal rights. However, there’s no reason to suppose that organizations actually are independent of human purposes or citizenly duties, much less equal to humans in status. Organizations are always created and maintained to meet community purposes. If those purposes are not being met, the organization can be restructured or disbanded. The community sets the rules for corporate creation and governance. In this sense, organizations don’t have the same claim to a “right to life” as the human person does. Therefore, organizations are not entitled to the same rights to noninterference and freedom from harm (although society may decide to grant some such rights to organizations). Furthermore, citizenship typically means more than just a political standing. It also reflects the citizen’s identity that is bound up with the nature and history of the community. Boundaries and rules of membership are highly significant, and the obligation to consider one’s own community as important becomes justifiable and perhaps even required. Citizens of the community typically have a duty to participate in making rules about membership and in carrying them out in order to preserve the distinctive culture of the community. There is every reason to think of business organizations as citizens in this sense. So, how can businesses be citizens? First, by being subordinate in value to human citizens, and second, by upholding the identity and values of the communities in which they operate. Making the Leap from Individual to Business Citizenship Because citizenship is ordinarily a status of persons in a place, we need to examine two shifts in the level of analysis to arrive at GBC. That is, we need to be able to move conceptually: 1. from the individual person to the business organization as citizen, and 2. from the local polity to a global setting. Table 3.1 illustrates the four states of citizenship that exist when one considers individual persons and organizations as units of analysis, and local scope or global scope as levels of analysis.1 (If you’re not familiar with the theoretical device of typology construction, check out Exhibit 3.2 first.) Reading across Table 3.1, we see that individual persons can be local citizens of a polity, and/or global citizens of the planet. Similarly, organizations can be “corporate citizens” tied to a particular culture or polity, or they can be “global citizens,” acting responsibly within and across polities.

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Exhibit 3.2 Building Theory: The Idea of Typologies Simply put, theories are efforts to explain: 1. what happens or what exists (descriptive theory), 2. what will happen if something else happens (instrumental or causal theory), or 3. why something happens the way it does (explanatory theory). In science, theory can be based on logic (deductive theory) or on observation (inductive theory). What we’re going to do in this chapter is to lay out a deductive, descriptive theory of business citizenship, based on a set of typologies. A typology is a way of categorizing some class of phenomena according to some relevant variable. The simplest typology employs two extreme values of a single variable, as in “There are two kinds of people in the world. . . .” The usual implication is that everybody can be categorized this way, and you’re either one or the other, but not both. That is, the categories are exhaustive and mutually exclusive. A two-by-two (or 2×2) typology cross-hatches the extremes of two variables. Here’s an example of a very simple 2×2, meant to reason about the relationship between, say, whether an act is legal or not, and whether it is ethical or not, and what could be expected under the various combinations: Legal

Illegal

Ethical Unethical

Now we have established the structure of our typology, and the next step is to logically name the categories represented by the cells in the remainder of the table. There are four cells, and thus four categories: legal and ethical, illegal but ethical, unethical but legal, and illegal and unethical. We now have a set of categories that represent all the logical combinations of the extremes of legality and ethics, and we can use this set as a single variable in other typologies. For example, we might want to make a typology that classifies behaviors by their ethicality/legality and their profitability, resulting in an 8-cell typology. In this chapter, we construct typologies based on ideas about citizenship, global strategy, levels of analysis, and degree of moral certainty. Not all of our typology categories are meant to be mutually exclusive and exhaustive; some are inclusive of the cell before but go beyond, sort of like saying, “Rain is nice, but sunshine is nice and warm too.” Categories, whether mutually exclusive or additive or simply descriptive, help the theorist to sort out the issues with respect to the categories. And so, using a series of typologies, we end up with a theory about why companies can be citizens and how they can think about putting citizenship behaviors into practice.

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CHAPTER 3 Table 3.1 Four States of Citizenship Level of Analysis Unit of analysis

Local scope

Global scope

The individual

CELL 1

CELL 3

Local citizen

Global citizen

A person can be a citizen of a city, province, or nation

A person can be a “citizen of the world”

CELL 2

CELL 4

Corporate citizen

Global business citizen

A company can be a citizen of a local community or nation

A company can be a “citizen of the world”

The business organization

Sources: Logsdon and Wood, 2002; Wood and Logsdon, 2002.

The Local Citizen Cell 1 represents the ordinary meaning of citizen as a person who holds a legal relationship to and often a national or cultural identity with a specific “local” polity such as a town or city, a state or province, a nation, or a supranational/regional grouping like the European Union. Citizenship is defined by the rules of that polity, which normally specify what relationship exists between the interests of persons and the polity as well as the rights and duties that accompany citizenship. Of course, individuals typically are citizens of a variety of polities at various levels of government (town, state, country, region), and some are even privileged to have dual national citizenship. Political theorists have argued for centuries about whether the government exists to serve citizens, or citizens hold their status to serve government. In modern times, the former position typically carries more weight. Governments are seen as entities that guarantee the baseline conditions for acceptable human life in communities. Citizens are typically granted a bundle of civil and political rights (voting, due process, individual liberties), and they are expected to fulfill duties such as those Aristotle named so long ago: paying taxes, participating in political affairs, and helping to defend the government from its enemies through military or other service.

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The Corporate Citizen Despite the concerns raised earlier, it is not a leap of faith to think of business organizations as citizens of local communities or of nations, as in Cell 2. This is the fundamental perspective underlying most current ideas about “corporate citizenship.” A corporate citizen is a business organization that is a responsible player in its local environment. Its community activities emphasize voluntarism and charity, not rights and duties, and the organization’s social identity tends to reflect the local culture. The duties of citizenship need not be spelled out exactly in order to exist. That is, both individual and corporate citizens may be expected to fulfill some citizenship role without having that role specified precisely. The idea is to give back something relevant and significant in support of a long-term viable relationship between government and its citizens. Your firm probably has some community outreach initiatives that are intended to improve the quality of life of human citizens that include the workforce, customers, and other stakeholders. The employees probably volunteer in community projects, and your company may make financial contributions to the local schools or nonprofit arts organizations. In these ways your company demonstrates its willingness to give back to the community in which it operates. There’s no requirement that your company make charitable contributions or sponsor the kids’ soccer club, but there are a wealth of opportunities to interact and assist in ways that make sense for the company and its employees. The Global Citizen Cell 3 refers to the history of ideas concerning individuals as “citizens of the world.” The global citizen is a person who holds a relationship to all peoples, regardless of polity, based on ideas of common humanity, interdependence, and universalism, and grounded in a few key rules or laws concerning universal rights and duties of persons to each other. When one begins to travel outside his/her own community, this awareness tends to develop or is strengthened. By the late twentieth century, technological advances in communications and transportation had made it possible for billions of people around the globe to observe the same events contemporaneously, watch the same entertainment, eat the same food, experience the same disasters, and to some extent develop a shared understanding of their common humanity.2 An understanding of the commonalities among peoples of different cultures rather than a focus on differences between them gives one the sense of belonging to a larger human community, and provincial thinking fades.

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CHAPTER 3 James W. Nickel observes that the United Nations Declaration of Human Rights gave the world a common language of rights that has shaped national and international relations for decades: Shaky governments facing severe problems often try to preserve their power by jailing, torturing, and murdering those who oppose their rule. When cases of this sort come to our attention, we are now likely to describe them as violations of human rights—instead of simply saying that they are unjust, immoral, or barbaric.3

In addition, having a common language of rights and a concept of universal “citizenship” gives credence and power to non-governmental mechanisms of social control that can override the politics of national sovereignty. In particular, cross-national market pressures of consumption and investment, along with global media attention and risks to reputation, have come to the fore as viable social control mechanisms in the hands of global stakeholders concerned with human rights violations in sovereign nations. The Global Business Citizen Finally, in Cell 4, a Global Business Citizen is not just Swiss, or Chinese, or American—it is a company that thinks globally and acts locally. Here, business organizations are also considered citizens of the world, with corresponding rights and responsibilities. To repeat the definition: A global business citizen is a business enterprise (including its managers) that responsibly exercises its rights and implements its duties to individuals, stakeholders, and societies within and across national and cultural borders.

The point of Table 3.1 is to illustrate that the idea of global citizenship for business organizations requires two major transformations: from person to organization, and from local to global arena. As we’ll see, each of these transformations involves problems and opportunities as we strive to understand just what global business citizenship is and what it means for managers. Three Approaches to Citizenship What type of citizen is your company? Is it a law-abiding, mind-your-ownbusiness kind of firm? Is it a rah-rah local good citizen, always jumping in to help out and to boost the community? Is it an enterprise with a strong set of values and operating principles that apply everywhere it does business?

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When a company says it is a “good citizen,” what does that mean? Political theory offers a variety of meanings and types of citizenship, but we have boiled them down to three currently relevant approaches to citizenship: the minimalist theory of civic association, the communitarian model, and the universal principles perspective. These are useful in sorting out practical and ideological differences in relationships among persons, organizations, communities, and polities. Two of these approaches lack the elements essential to global business citizenship and cannot in the long run yield a capitalism that is sustainable. To illustrate the differences among these three approaches, we’ll use an example of how a business might define and respond to a pollution problem within each of these perspectives. Minimalist Citizenship: A Status of Convenience The minimalist theory of civic association values individual liberty and the pursuit of self-interest above all. In the minimalist’s dream world, there are no restraints on his or her behavior. In the real world, however, the minimalist acknowledges that some restraints are necessary to keep others from infringing on one’s right to liberty.4 Thus, civic associations form when residents of a common jurisdiction recognize and agree to certain rules that regulate their conduct. Social units (like governments) exist because they are essential for individual survival, but social bonds are seen as weak. Compliance with laws is seen as contributing to achievement of personal goals, and citizenship is viewed as a status of convenience as long as it serves citizens’ self-interests and liberty. Civic association is not to be confused with community, which has the special meaning of a shared enterprise. The moral relationship among citizens in a civic association requires the right to justice and equal treatment under law. These rights could be put into effect as basic legal rights such as the right to protection from robbers, the right to legal representation, and so on. Rights evolve and are extended to more groups only as the association discovers intolerable problems that are not dealt with effectively under the more constricted system of rights. This essentially libertarian view of citizenship requires equal treatment in terms of “negative rights”—that is, the right of citizens to pursue their own interests without interference. This approach permits citizen participation in rule-making but has no penalties for citizens who do not participate. Minimalism has a direct counterpart in the stockholder view of the firm. Contracts—among persons who freely enter into them with full knowledge— form the assumed structure of business transactions in the minimalist perspective. The firm itself is not a real entity but is merely a “nexus of contracts”

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CHAPTER 3 among suppliers of various inputs whose rights are negotiated as part of their contracts with the firm. In this view, shareholders provide capital and acquire property ownership. Management’s role is to coordinate the negotiating process among the various input providers, acting as agents for the shareholder-principals. Shareholders are vulnerable because their delegation of power to agent-managers leaves them with high monitoring and control costs and a subsequent higher risk that managers will succumb to temptation and act in their own interest instead of in the interest of the shareholders. Corporation law, in this view, exists largely to protect the shareholders from managerial opportunism, but only as a supplement to market forces, that is, as a correction to the rare market failure. Managers operating with the minimalist perspective seek the lowest cost of production in order to maximize profit. They would prefer not to spend money to control pollution, but rather dump it into the air, water, or land. If other members of the polity sue because the waste is a nuisance or make a convincing case that their rights are being violated, managers will either install the minimum pollution control equipment or they will relocate. There is no loyalty or attachment to the civic association for a minimalist person or company. Simply put, in a minimalist world, a business organization is merely a shell within which individual sales, employment, and investment contracts are negotiated and fulfilled. If and only if the principals (in capitalist organizations, the shareholders) perceive it to be in their self-interest, they may direct the organization to act in particular citizen-like ways such as contributing to charity or participating in a community event. The language of citizenship might even be used, but the motivation is not to provide a collective good or to contribute to society’s well-being, but only to achieve a private end.5 The organization itself cannot “be” a citizen, analogous to individual persons, in the minimalist approach. Communitarian Citizenship: One for All Communitarian reasoning embeds citizens in a particular social context, rather than viewing them as essentially autonomous, detached decision makers and actors as the other two models do. One’s personal identity is bound up with the nature and history of one’s community, culture, or country. Boundaries and rules of membership become highly significant, and the obligation to consider one’s own community as more important than other communities becomes justifiable and perhaps even required. Citizens of the community have a duty to participate in making rules about membership and conduct and in carrying them out in order to preserve the

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Exhibit 3.3 “Good Corporate Citizens” A great many companies consider themselves to be good corporate citizens. You might think that this means that they are responsible and law-abiding, but in fact it generally means that they are charitable and do “good deeds.” The “corporate citizenship” category in Industry Week’s annual “100 Best-Managed Companies” is measured as percent of pretax earnings given to nonprofits. In Fortune’s annual “most admired” list, the corporate citizenship category measures the company’s community involvement and sometimes that of its employees separately. Certainly it is admirable, and likely a sign of good management, for a company to engage in philanthropy and community volunteer activities. However, these things won’t make a company into a global business citizen. It’s like the idea of “random acts of kindness,” which finds so much favor with so many people. But why should kindness be random instead of routine? Similarly, why should a company’s community responsibility be voluntary? If we as individuals have a duty to be kind, is it a stretch to say that business organizations have a duty to be responsible?

distinctive culture of the community. According to the communitarian view, rights have been overemphasized in some nations, such as the United States, to the detriment of collective well-being, but the citizens’ duties to the community are just as important as rights, if not more. 6 In addition, communitarians recognize that guaranteeing rights is costly and timeconsuming, and thus more stringent requirements for citizenship can make sense in political-economic terms. A communitarian society typically limits membership to “our” people, however defined. The business organization in the communitarian view is not an empty shell, or a mere “nexus of contracts,” but is a tangible and functioning member of a community, distinguishable from the individuals who own and work for the organization. Business organizations are entities that emerge to help the community and are expected to act in the community’s interest as a duty of membership. And, indeed, the business organization wants to act in the community’s interest because the community gives meaning to what the organization is and does. In some ways this view is compatible with early definitions of corporate social responsibility—the idea that businesses should be responsible for how the benefits and harms of their actions are distributed. In addition, the communitarian view is consistent with the concept of “corporate citizenship” when it is focused exclusively on the concerns and welfare of specific communities.

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CHAPTER 3 A communitarian firm’s response to pollution would take into account its community’s understandings and norms about collective well-being. Such a firm would likely exercise willingly a duty not to harm the community. However, a communitarian approach to pollution control would be limited to its own specific community and would not include other communities where it does business but is not a member. Thus, a communitarian company-citizen might well keep local waters clean in its home community by putting its wastewater in the streams or sewers of other communities. Citizenship Based on Universal Principles The universal principles perspective, a third prevalent view of citizenship, is based on the moral assumption of rights as necessary for the achievement of human agency—defined as the freedom to pursue one’s interests. Citizens with this view see the primary role of government as securing and protecting these conditions of human agency, not just for oneself, but for every individual. Not only must the state protect negative rights of non-interference— those guarantees of human liberty such as protection of the right to free speech and assembly, and the right to vote—but also it must identify and protect positive rights that must be provided in order to achieve autonomous human action, such as the right to education and the right to health care. A critical issue in this perspective is the possibility and process of arriving at a set of common values and related rights and duties that can be supported across cultural boundaries, and perhaps political ones as well. Individuals and societies delegate to business organizations much of their ability to achieve their diverse wants and needs, and they must therefore also give organizations a degree of freedom from direct and constant control. Privately owned organizations are given many important tasks needed by the society, such as job creation, economic growth, research and development, and provision of consumer goods. Organizations do not have rights and privileges identical to those of individual persons, but they do have limited rights and associated duties so that they can achieve these goals. The rights and privileges granted to business citizens are those needed to permit the organization to act appropriately as agents of people and societies. Ethical values and mechanisms of social control, such as honesty, trust, and rule of law, are ways of structuring relationships and exchanges so that uncertainty is reduced and efficiency can be enhanced. The global business citizen integrates these basic ethical values and mechanisms of social control into its internal ways of making decisions and uses them as guidance everywhere they operate. A universalist firm would likely enact a duty to all people and all communities to minimize pollution wherever its harms are experienced. Such a firm

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would not dispose of its wastes in an unsafe manner in any community. It would recognize the legitimate need for efficient government regulation to protect humans and the environment from externalities and other market failures. Recycling, reclamation, and redesign to minimize waste in the first place would be preferred ways of addressing pollution problems even if local regulations do not require this degree of pollution control. Comparing Views of Citizenship It is interesting that although the minimalist position and the universal principles view seem to be far apart in perspective, they are united in their support of human autonomy and certain rights for citizens. They differ in the means acceptable to reach this desirable end. The minimalist view tends toward a “least government” approach, while the universal principles view is more willing to accept the validity of government action to ensure rights. In contrast to both, the communitarian position does not emphasize individual liberty above all, preferring to balance concerns for liberty with concerns for the collective well-being. In addition, a communitarian society might have more or less government, depending on what the community believes is needed to enforce rights and duties in its particular context. Business organizations are viewed very differently in the three approaches to citizenship. Businesses in the minimalist view are just shells within which various actors (investors, employees, customers, suppliers) engage in contracts to pursue their own interests. The organization itself cannot be a citizen in this view. By contrast, firms in the communitarian perspective are citizens in the sense of having an identification with their home community and supporting its well-being. “Corporate citizen” is an appropriate term for a firm operating on communitarian assumptions. Finally, a firm that operates according to a universal principles view of citizenship is one that can claim the name of “global business citizen,” from cell 4 back in Table 3.1. Such a company “thinks globally and acts locally” by having basic ethical values that apply everywhere it operates, and by implementing those values in a manner consistent with and respectful of legitimate local cultural differences. So—what kind of “good citizen” is your company? Is it a profit-seeking minimalist citizen, putting up with government and community only because they serve the firm’s own purposes? Is it a local community star, identifying and fully integrated with a region but not so concerned about “those others” who live elsewhere? Is it a global company that is trying to wrestle in good faith with the challenges of multiculturalism and globalization? Is your firm a global business citizen?

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CHAPTER 3 The Process of Global Business Citizenship Multinational enterprises are not bound by the rules of a single community, but are challenged to deal with differences among community norms, rules, and performance expectations. The traditional view is that corporations should conform to local practice by always following local laws and customs— “when in Rome. . . .” An alternative view has emerged over the past quartercentury that companies should apply uniform policies across their worldwide operations. Both of these approaches have weaknesses, but together they contain the seeds of an optimal hybrid strategy. What does it mean in the modern world to argue that businesses are members of society and are thus subject to societally based social controls? Is this a viable idea in a world where virtually all the factors of production move freely among nations and cultures? Consider, for example, the Wall Street Journal article explaining why, amid the international boom of mega-mergers, it was not surprising for Daimler Benz AG and Chrysler Corporation to merge: In the culture that leaders of global businesses inhabit, where shared values of open markets, hard money and standardized technology increasingly take precedence over old-fashioned nationalism, such transnational combinations are logical, and they are becoming more commonplace every day. . . . More and more, national boundaries, cultural variations and accidents of geography such as the Atlantic Ocean aren’t stopping business leaders who see a chance to expand their reach as trade barriers fall, communication becomes cheap and consumer tastes for everything from cola to cellular phones converge.7

Business citizenship defines a business organization’s relationship to nation-states, to other organizations, and to human beings. It is thus an ethical enterprise. But in this diverse world, which ethics—whose ethics—should prevail? GBC addresses this question by acknowledging varying degrees of ethical certainty about what is the right thing to do. A global business citizen accepts a limited number of basic universal principles, such as, “it is wrong to harm innocent persons.” However, in conducting business activities, this organization realizes that although application of the fundamental principles is straightforward in many cases, there are situations where local norms appear to be in conflict with those principles, or application of the principles will cause unintended negative consequences. There are even situations where the local manager cannot tell whether local customs conform to or conflict with company norms, or whether the comparison is even relevant. In these cases, the degree of ethical certainty is much lower.

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Table 3.2 Implementing Business Citizenship: Strategic Approaches

Degree of Ethical Certainty

Approach to Strategy Multi-Domestic Globally Integrated

High: The company accepts a limited number of basic universal rules or principles.

(Ethical relativism)

Code of conduct

Moderate : Local norms are consistent with, or vary acceptably from, basic principles.

Local implementation

(Ethical imperialism)

Low: Local norms appear to conflict with, or are incompletely governed by, principles.

Analysis and experimentation

Organizational and systemic learning

Source: Adapted from Logsdon and Wood, 2002.

In international business, a company will struggle to decide between a multi-domestic strategy, which tailors its strategy to local conditions, and a globally integrated strategy, which strives to achieve a unified strategy across all units. The analysis in Table 3.2 illustrates that one or the other of these strategies alone is inadequate to address global business issues across all levels of ethical certainty. When a matrix of strategy and ethical certainty is constructed, as seen in Table 3.2, some striking results emerge. First, a multi-domestic strategy cannot logically rely on universal principles.8 This is the “when in Rome” philosophy that values compliance with local norms above all. Operating in different ways in different cultures constitutes ethical relativism, which can too easily allow a company to violate ordinary standards of ethics, especially where a local government is lax, repressive, or corrupt. An example of ethical relativism would be allowing for racial discrimination in plants located in South Africa when apartheid was legally required, while professing and practicing equal opportunity employment in the United States and Canada. The problem, of course, is that managers trying to use a relativist approach can find themselves condoning practices that are morally abhorrent to them and unacceptable to their companies. A second “aha!” is that a globally integrated approach simply will not work when it comes to the local variations of human practice and belief. A globally integrated approach requires that identical principles and practices occur everywhere a company does business, and that is nothing more than

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CHAPTER 3 Figure 3.1

The Process of Global Business Citizenship STEP 1 Values in a Code of Conduct

STEP 4 Learning Within and Outside the Organization

STEP 2 Local Implementation

STEP 3 Problem Analysis & Experimentation

ethical imperialism, that is, “my way or the highway.” This is dysfunctional because it fails to recognize and respect legitimate differences in practice that do not violate principles. However, a hybrid approach to strategy and ethics in global business operates in different ways at different levels of ethical certainty. We have eliminated the ethical relativism and ethical imperialism cells of Table 3.2, leaving the four remaining cells to constitute the process of implementing global business citizenship. Guidelines for Implementing GBC Figure 3.1 shows a 4-step process model for implementing global business citizenship, based on the analysis shown in Table 3.2. Step 1. Values in a Code of Conduct As a first step toward global business citizenship, the company accepts a small set of basic principles that govern its conduct wherever it operates. At this step, a globally integrated approach is not only appropriate but desired; a high degree of ethical certainty governs the choice of principles included, and these are the principles the company stands for and lives by. We propose that every company begin the trek to global business citizenship by formulating a values statement, using principles that reflect a

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universally acceptable and reasonably complete set of human values. These principles of good conduct should be based on core values drawn from the convergence of the world’s major philosophical and religious traditions that apply regardless of common practice or local belief. The norms identified in the United Nations Universal Declaration of Human Rights might serve as a good source of such principles because of their pervasive moral authority and widespread acceptance. This exercise is especially beneficial for surfacing and clarifying ethical values and their underlying hypernorms for companies that have not been articulate about these in the past, whether or not they have been acting upon such values. A code of conduct serves both as a statement of basic ethical principles and as an operational guide to behavior. Thus, the code should provide specific guidance for situations that employees will typically encounter. A useful code of conduct will cover normal business functions and operations, as well as any situations that are specific to the firm or its industry. For example, a company that makes extensive use of subcontractors would include guidance on how to monitor workplace practices on site to prevent violation of a principle against inhumane labor conditions in the manufacture of its products. More on this step in chapter 4. Step 2. Local Implementation Imagine a firm that has a strong value for respecting workers’ private lives, but then implements this value by imposing home-country religious holidays in all locations. Christmas and Easter holidays would not mean much in Israel; Yom Kippur and Passover holidays might stir labor unrest in Pakistan or be forbidden in Iran. Eid ul-Adha (Muslim), Gantan-sai (Shinto), Janam Ashtami (Hindu), Maunajiyaras (Jain), and Nichiren Daishonin (Buddhist) are all sacred holidays, but they fall during different times of the year and are observed only by practitioners of that religion.9 Managers must implement the global code of ethical conduct in all the various locations where a company does business. They may have learned how to handle the variety of religious holidays, but this is an easy problem compared to many others. What are managers to do, if they don’t want to be ethical imperialists and force an unpalatable solution on the local workforce? The GBC process suggests that as long as the big principles are not violated, there is plenty of room—and reason—for local variations in implementing a company’s code of conduct. In some cases, there will be no conflicts or gaps between the guidelines of the code and local customs, cultural norms, or national standards. In such cases, the company can readily apply its code without modification.

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CHAPTER 3 But many situations in international business are of moderate ethical certainty. This means that it’s not necessarily clear whether the company’s big principles and the locale’s customs and norms are compatible, but at least they do not seem to be incompatible. One can allow and even plan for variations in implementation of the code of conduct without violation of the big principles. To stick with the holiday example, companies doing business in predominantly Christian regions could, perhaps, have a few fixed holidays and a few floaters, to accommodate workers of various religious traditions. The alternative, ethical imperialism, exists when organizations fail to respect or to value the existence of local cultures, and exhibit naïve or coercive disrespect of legitimate variations in how ethics are lived out in different locations. Of course, managers must be conscientious in making these judgments. They must be aware of the problems that may arise by arbitrarily applying the company code in cases where customs or local standards are in conflict with it. Or, there may be unintended consequences from implementing the company code that will create either problems for stakeholders or ethical dilemmas for the company that were simply not addressed in the code itself. Engaging in stakeholder dialogue and being open to feedback about code implementation is essential to uncovering such problems. How else would the managers discover that the operations of their organizations were in conflict with local norms if they didn’t talk to the locals? When it comes to the attention of the organization that conflicts exist, managers must take the next step in the GBC process. Step 3. Problem Analysis and Experimentation Ethical uncertainty reigns when cultural norms are incomplete, nonexistent, or appear to be in conflict with those principles that are contained in the code of conduct. When this is the case, the organization must make two important steps in its journey toward citizenship. First, the company must analyze cases in which local customs or norms seem to be at variance with company standards. These cases may include situations where local custom diverges substantially from the company code, and local managers will need to examine whether these differences should be resolved in favor of the code or not. Second, after thoughtful stakeholder engagement and careful analysis, the organization needs to design experiments to test ways to implement the code in conformance with big principles and with respect for local culture. Analyzing ethical and cultural conflicts is little different from analyzing production or financial or distribution problems. The task is to identify the problem, take it apart into its various pieces, and search for similarities and

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differences that suggest solutions. As with other problems, a manager tries to ask good questions and learn from the experts. Stakeholders can provide important information about local practices, customs, and norms, and such input will help the manager to analyze conflicts or gaps. It is especially useful in the problem analysis stage to have an in-depth understanding of the principles underlying the company code. Experimentation involves searching for creative and practical solutions to values conflicts. One wants to honor the spirit of the code by adapting practice where feasible, and sometimes nothing but trial and error will do. Managers may be up against a conflict they’ve never experienced or were completely unaware of. Being willing to experiment in good faith, working all the while with affected stakeholders, is key to implementing a global code of conduct in diverse settings. In cases where the application of the company code will have unintended negative consequences for one or more stakeholders, the manager needs to carefully consider the nature of these consequences and whether they can be mitigated. Because headquarters personnel are not necessarily aware of negative consequences arising in some local cultures, you, as manager, may need to recommend changes in the company code itself. Let’s take an example such as setting a fair wage. Managers may not be aware when first entering a new country that wage practices vary dramatically from the home country, although such information should be routinely included in the demographics of site location decisions. No matter—they quickly discover from local peers, government officials, and workers themselves what the norms and expectations are regarding compensation. Through continuing stakeholder engagement, the managers can discern whether or not local customs are in conflict with company norms. If so, it may be that managers can find through experimentation a reasonable way to incorporate local customs and still be consistent with company standards. In other cases, the manager may resolve conflict by supporting the company’s code and will need to communicate clearly and respectfully to locals the reasons why this decision has been made. Principles with universal acceptance can be most helpful and persuasive in articulating these reasons. Let’s say that the company code specifies that compensation will be adequate to sustain a minimum lifestyle and will not be discriminatory on the basis of age, sex, religion, or ethnicity. Operating in a heavily unionized area would likely call for acceptance of a legitimate bargaining representative and formal contract negotiations. Operating in a country that bans trade unions might require a different approach to setting wages—comparing job requirements, investigating the quality of life of ordinary workers, and gathering information from government agencies as well as from local

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CHAPTER 3 community leaders. In a developing country, the firm might even consult with NGOs that assist the poor with health care, food supplements, water, electricity, or education—just to find out what life is like for workers. Then there’s the issue of discriminatory wages. In many of the world’s developing nations it is considered equitable to pay women quite a bit less than men, even though they may be doing the same jobs. In various countries, longstanding ethnic, religious, or racial tensions have created “permanent underclasses” of workers who can legally be given lower wages for comparable work. In such circumstances, a GBC company is careful to check out the history and practices of a new locale, compare the cultural norms to its code, and seek ways of meeting its fundamental principles while respecting local cultural differences where possible. Needless to say, managers would need to verify their information and sources to avoid being taken advantage of by sharp locals who see an opportunity to gain unfairly via bogus wage claims! We explore the crucial techniques of stakeholder engagement further in chapters 5 and 6. Step 4. Learning Within and Outside the Organization This essential last step in the GBC implementation process is the one that turns trial and error into practical systematic knowledge. No company wants its managers to keep making the same mistakes over and over. Eventually, with good data and a company-wide effort to shape and share it, managers can learn to differentiate situations and then apply solutions accordingly. Chapters 7 and 8 address the organizational change processes that can be used to help companies learn how to learn. Local implementation (Step 2) as well as analysis and experimentation (Step 3) will best serve the human enterprise and the organization’s purposes when the multinational enterprise (MNE) institutes feedback loops and learns systematically from all its experiences. Systematic learning involves grasping the structural and normative similarities and differences among the various situations the MNE encounters in its many locations, extracting the essence of these experiences, and providing models or exemplars of what works and what doesn’t work in terms of adapting and experimenting with implementation. After systematizing what it has learned from implementation and experiments, a GBC company will institutionalize those policies, practices, and behaviors that best serve the interests of people and the firm wherever it operates. A database, training modules, and other means of incorporating learning throughout the organization are characteristic of this mature phase of global citizenship behavior. For example, Levi Strauss & Co., Inc., after a decade of experiments in implementing its supplier code of conduct and

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Exhibit 3.4 GBC Simplified 1. A company should select a small set of big principles to guide its decisions and activities. 2. The principles should be applied wherever the company operates, with sensitive appreciation for differing local customs that are not in conflict with the fundamental principles. 3. In cases where implementation of the basic principles will cause unintended harms or conflicts with local norms, managers can experiment creatively with locally effective ways of implementing code principles. 4. The entire organization can learn from implementation and experimentation, and these lessons should be shared with organizations experiencing similar problems.

country terms of engagement, finally began to compile a systematic database that will help all the company’s managers identify problems and issues and apply workable, tested solutions to them. Names, dates, places, and cases all find their way into the database, so no manager need be blindsided by the shenanigans of a known cheater or a subcontractor who likes to skate on the wrong side of labor law. Ultimately the GBC process is cyclical. As a company learns how to implement its code, and how to understand its local stakeholders, there will be instances where the code turns out to be wrong, or unworkable. Cycling back around, then, the good-citizen company learns how to critique its own values and processes and to change its guidelines when it becomes apparent that certain aspects of the code of conduct cannot reasonably be implemented or should not stand as guiding principles. There’s one more aspect to GBC learning, and that is sharing knowledge with other companies so that the entire business sector—and other types of organizations too—can learn. In several upcoming chapters, we’ll explore some of the ways in which businesses are beginning to share their experiences and attempts at being good global citizens. Conclusion Most companies and their managers want to operate responsibly, and there’s a lot of innovation and good ideas and experimentation out there already. What

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CHAPTER 3 we are proposing is that managers learn how to serve as the role models they can be by standing for something bigger than their organizations, something bigger than profit, and by systematizing their knowledge as it emerges. Global business citizenship provides the conceptual and operational vehicle for bringing the conscience of capitalism into the twenty-first century. By accepting the mantle of global citizenship, individual managers will take their places belonging to humanity, rather than only to a local polity. Acknowledging the universal rights and duties of both individuals and business organizations and accepting their dependence on a thriving natural environment, managers are in the best position to implement global business citizenship. Indeed, only managers can do this.

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h4g

Principles, Codes, and Policies The Guidance System for Global Business Citizenship —————— ————

Many wonders of this world—from high-tech missiles to automobiles— operate according to built-in guidance systems that set parameters for action, respond to external events, and help the operator make appropriate choices. People too, and their organizations, have guidance systems, built on values, learning, and experience. A good way to think about values and principles— those underlying preferences and big ideas that guide our actions and to which we refer when evaluating outcomes—is as a guidance system for human beings and for their organizations. Global business citizens require particular kinds of guidance systems that ensure alignment between “talk” and “walk.” Organizational Guidance Systems A corporate guidance system can be as simple as the founder’s few dictates or as complex as the vast management control and information systems network that characterize most large firms. Corporations based in developed economies are likely to have a mission, a vision, a values statement, a code of conduct, and a set of policies with respect to the code. At least since the ethics meltdowns of the late 1990s and early 2000s, executives have struggled with finding ways to establish clear standards and to tie them consistently to corporate structure and process as well as to relevant legal requirements. A recent study of companies in 22 nations, for example, reported that “in 1999,

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CHAPTER 4 78% of boards of directors were involved in establishing ethics standards compared with 41% in 1991 and 21% in 1987.”1 When it comes to organizational ethics guidance, terminology matters less than content. Managers may think there’s no code of conduct in their company, but they may have a detailed employee handbook—or a rules and regulations booklet, or a policies and procedures manual, or a statement about legal compliance and conflicts of interest—that serves the same purpose under a different name. Whatever the title, what matters is that organizational members have guidance on how to handle the commonplace and the difficult dilemmas and ethical situations they may face in the workplace. Some companies do not depend on complex rule books for guidance, referring instead to a simple statement of values or principles. Johnson & Johnson’s familiar credo, for example, is a short page of priorities that appears in company conference rooms and managers’ wallets. The credo is the primary point of reference when any questions arise as to whose interests the company should serve or how they should act. Guidance by value statements is more typical of smaller companies. The Mudd Group, for example, an Iowa-based automotive advertising agency, tries to do business according to its three core principles—respect people, make money, have fun—without systematizing these values into a detailed rule book.2 For large U.S.-based companies, the rules of the ethics game changed in 1991, with the adoption of new U.S. Sentencing Commission Guidelines to apply in cases when corporate employees are convicted of crimes. The guidelines allowed companies to shield themselves from significant liability if they had a code of conduct, regular training, processes for reporting legal violations, due diligence in hiring, and other compliance-related policies and practices. The sentencing guidelines were updated in 2004 to include ethics practices as well as legal compliance. Furthermore, the Sarbanes-Oxley Act of 2002, passed in the wake of the Enron/Arthur Andersen meltdown, imposed stringent ethics and accounting requirements on all firms listed on American stock exchanges, no matter where they are based. And, the European Union (EU) has been moving toward similar policies to govern EUbased companies. Although terminology as well as legal standards vary in practice, there’s one idea here that can distinguish GBC companies from non-GBC companies. The key difference appears in Step 1 of the GBC process, which involves accepting a small but reasonably comprehensive set of universal principles and incorporating them into codes and policies that make sense for and reflect the core values of the organization and its stakeholders. “Small” is the easy part of this criterion. It’s the “reasonably comprehensive” and “universal” parts that are difficult. The Mudd Group’s principles,

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PRINCIPLES, CODES,

AND

POLICIES

Exhibit 4.1

Johnson & Johnson Our Credo We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens—support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return. Source: http://www.jnj.com/our_company/our_credo/ (accessed January 31, 2005). Used with permission.

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CHAPTER 4 Table 4.1 Comparing Organizational Guidance Systems GBC companies

Non-GBC companies

Mission

Articulates the company’s reason for existing and the meaning of its work, consistent with universal principles

Articulates the company’s reason for existing and the meaning of its work

Vision

Articulates what the company aspires to be and what its future should look like, consistent with universal principles

Articulates what the company aspires to be and what its future should look like

Values

Articulates what is most important to the company, consistent with universal principles

Articulates what is most important to the company

Code of conduct

Identifies areas of vulnerability and offers general guidance to employees, consistent with universal principles

Identifies areas of vulnerability and offers general guidance to employees

Policies

Within the framework of the code, offers specific guidance to employees in areas of vulnerability, consistent with universal principles

Within the framework of the code, offers specific guidance to employees in areas of vulnerability

for example, are a small enough set, and they provide good guidance for a small company. But where’s the environment? Where’s the idea of not causing undue harm? Where is legal compliance? Where is honesty, loyalty, trustworthiness? And can “having fun” really be thought of as a universal value in business? In Table 4.1 we hammer home this point. GBC and non-GBC companies alike can have well-developed, articulate, functional, and meaningful missions, visions, values, codes, and policies. What differentiates a GBC company, though, is that the principles upon which all these statements are based are a small, reasonably comprehensive set of universal principles. Okay, perhaps you’re thinking, principles are all well and good, but what about the differences between what we say and what we do? So let’s bypass these tricky ideas of “reasonably comprehensive” and “universal” principles for the moment and take up this question of words versus actions. WorldCom had a perfectly fine mission, vision, and values statement. It had a code of conduct and a very extensive set of corporate policies. Before the company crashed into Chapter 11 bankruptcy, though, executives made what they called a one-time exception to ordinary accounting and reporting procedures in order to “fix” results to conform to Wall Street expectations. The slippery slope of deception came to be normal procedure; as time went on, it became routine practice to “fix the numbers to meet expectations”

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every quarter; more people became involved; and the problems got more serious and increasingly unresolveable.3 Later it became clear that the CEO, the CFO, the accounting chief, and numerous other senior executives had been engaged in a fraud that eventually totaled $11 billion. What’s wrong with this picture? Simply put, WorldCom senior executives lived by a set of values and principles emphasizing corporate growth and shareholder value—so that the code of conduct and its policies were just so much printed paper when push came to shove and quarterly projections weren’t going to be met. WorldCom was not governed by a small set of reasonably comprehensive, universally acceptable principles. Even the best managers in the most ethical companies need to take this message to heart. The problem is, a code of conduct and specific policies that are not grounded in strong, comprehensive, universal principles are going to fail when employees meet head-on with the world’s many and diverse cultures and the inevitable financial pressures of globalization. GBC Requires a Small Set of Comprehensive, Universal Principles Principles are the underlying statements that support a theory or belief system or world view.4 Principles may express values (“human life is sacred”), or understandings about how and why things are (“I think, therefore I am”), or beliefs about what is true (“that act is good which creates the greatest good for the greatest number”). The set of principles governing a GBC company and informing its mission, vision, values, code, and policies has three essential attributes that are worth reiterating: 1. The principles are comprehensive in the sense that no major domain of ethical conduct and responsibility is left out. 2. The principles are universal, not in the sense that every person on earth accepts them, but in the sense that most cultures would consider them to be valid, though perhaps not preferred, sources of guidance. 3. The set of principles is small to enhance clarity and lessen confusion. And after all, the set of possible universal principles is necessarily small. It doesn’t really matter whether principles are expressed in mission, vision, or values statements. Companies have different practices here, and it isn’t a problem. What matters, though, is that the principles accommodate a

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CHAPTER 4 broad range of ethics in a way that can be generalized to all the company’s sites and enacted by all the company’s employees. Take as an example General Motors, one of the world’s largest and bestknown companies. GM’s Board of Directors has a mission statement, which focuses on shareholder interests, with stakeholder obligations as an add-on: The General Motors Board of Directors represents the owners’ interest in perpetuating a successful business, including optimizing long-term financial returns. The Board is responsible for determining that the Corporation is managed in such a way to ensure this result. This is an active, not a passive, responsibility. The Board has the responsibility to ensure that in good times, as well as difficult ones, Management is capably executing its responsibilities. The Board’s responsibility is to regularly monitor the effectiveness of Management policies and decisions including the execution of its strategies. In addition to fulfilling its obligations for increased stockholder value, the Board has responsibility to GM’s customers, employees, suppliers and to the communities where it operates—all of whom are essential to a successful business. All of these responsibilities, however, are founded upon the successful perpetuation of the business.5

GM’s ambitious vision is found in a website section called “GMability,” which apparently refers to the company’s social responsibility stance, although the vision itself does not: GM’s vision is to be the world leader in transportation products and related services. We will earn our customers’ enthusiasm through continuous improvement driven by the integrity, teamwork and innovation of GM people. Becoming the best is an unending journey, a constantly changing destination. But that’s where we’re determined to drive—one car, one truck, one customer at a time.6

Values are the preferences we hold that determine in large measure how we give priority to certain things or actions or beliefs over others. Values establish a hierarchy of worth and tell us which things or behaviors are worth our time and effort. Of GM’s six core values, two are directly ethical in nature, and four are focused on traditional business processes, as seen in Exhibit 4.2. At GM—the company that brought us the ultimate gas guzzler, the Hummer—customer enthusiasm is the Number One value priority. It follows that GM’s budgeting and planning would emphasize product design, quality production, customer service, and marketing. What happens at GM when the desire for customer enthusiasm clashes with the values for integrity, respect,

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Exhibit 4.2 General Motors’ Core Values 1. 2. 3. 4. 5. 6.

Customer enthusiasm Integrity Teamwork Innovation Continuous improvement Individual respect and responsibility

Source: http://www.gm.com/company/gmability/sustainability/reports/04/ 300_company/311_vis_vis.htm(accessed November 27, 2004).

or responsibility? The core values statement itself doesn’t give us any guidance here. Finally, GM’s code of conduct is entitled “Winning with Integrity.” It contains extensive and more or less standard guidelines for employee conduct in areas of personal integrity, fair treatment and respect, diversity, health and safety, conflicts of interest, integrity of information and property, gifts, entertainment and gratuities, fair competition, insider trading, government bribery, the Foreign Corrupt Practices Act, export controls, and integrity toward the environment.7 We won’t examine GM’s implementing policies here, but the code of conduct is extensive enough to serve as a policy statement itself. Are GM’s values—and presumably the principles based on them— comprehensive and universal? The four business process values—customer enthusiasm, teamwork, innovation, and continuous improvement—are neither comprehensive nor universal, and they don’t have to be. These values represent GM’s core competencies and strategic advantage; they shouldn’t be applicable to all companies. The values of interest for GBC, though, are different. Integrity plus individual respect and responsibility are ethical values that could be considered universal, as we shall see shortly. But are they comprehensive? Would these values keep GM from polluting the earth, shifting production rapidly and thoughtlessly to the cheapest labor sites, or interfering with legitimate government processes? Universal Principles and Ethical Relativism Questions such as these lead us back to the really tough problem—this idea of universal principles. Where do they come from? How do we know when

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CHAPTER 4 we have found the right ones? Do principles change, and, if so, how can they be “universal”? And worst of all, with so many cultures in the world, so many religious beliefs and philosophies, how could any principle ever be considered “universal”? When dealing with cultures that differ considerably from our own, we may be struck by the superficial differences and assume that the fundamental social values also differ. This may seem shallow, but think back to your first experience of a different culture. Were you captivated by differences in hair style or skin color, by colorful clothing, by homes and furnishings outside your comfort zone? The first step is often to state that each culture creates its own values, and they should all be honored. This is an easy step to take, but it is a path to the quagmire of cultural and ethical relativism. For example, casual observation of a Japanese business executive might suggest that family is a less important value than work dedication, because husbands often spend very long hours at work and then stay out late, drinking with fellow workers. While Japanese cultural norms may differ somewhat in terms of how worker loyalty is evaluated and how trusting male relationships are formed and maintained, compared to American or European norms, it is not obvious to the naïve observer that Japanese men put up with all this because they want to provide a good income to support their families.8 Ethical relativism is not just misleading; it is ultimately a trap that keeps us from making sound judgments about what is good and bad. All human cultures have fundamental values for life, family, relationships, loyalty, authority structures, and so much more. There are many problems with a relativist stance, but the main one is this: a relativist ultimately cannot take a stand on anything at all. Any behavior, no matter how repugnant or harmful or violent, has to be accepted by the observer if it is accepted within the culture being observed. Push hard on ethical relativism, and we ultimately arrive at an “ethical” justification for horrors no rational person would want to accept. GBC companies do not want to go there, and so they will emphasize a small, relatively comprehensive set of universal values that can be implemented in a variety of culturally sensitive ways but that have limits as to how far they can be pushed. “When in Rome, do as the Romans do” might be good guidance for etiquette, but it is not good for matters of ethics. What Are “Universal” Principles? As the world grows figuratively smaller and literally more intertwined, the search is on for values and norms that can be respected and upheld by all the

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world’s peoples. A great many social or religious groups attribute universality to their way of thinking, but such belief systems tend to exclude all others, as invalid, misguided, or even “evil.” In global business, the search for universal principles shouldn’t be seen as a chance for companies to claim “my way or the highway.” Instead, the search expresses a need for a coherent nexus of standards that can accommodate cultural variations and still retain fundamental values such as integrity, trustworthiness, causing no harm, and aiding those in need. Questions of social power and interpretation inevitably arise when we try to think of universal ethical principles. Whose values will prevail? To whom are certain values to be applied, and in what manner, and under which circumstances? Who counts as a human being? What value do non-humans have? And so on. The problems may seem insurmountable, but the fact is, there are a number of efforts already underway to actually identify and define a small and reasonably comprehensive set of universal values. These efforts are occurring within the three major sources of ethical principles: • religion • reason and philosophy, and • social consensus and political arrangement. Let’s take up each in turn. Principles Originate in Religion Many people believe that religions—serving as the root of cultural values— are so different across cultures that there is no basis for comparison and no way of thinking about “universal” ethical principles. Consider, however, the ethical rule that is embedded in Western religious and humanist philosophy as the Golden Rule. In modern English, the rule would be this: “Treat others as you want to be treated.”

Now take a look at the central texts of the world’s major religions, and see if there is anything like the Golden Rule9: Hinduism: Buddhism:

“This is the sum of duty: Do naught to others which would cause pain if done to you.” “Hurt not others in ways that you yourself would find hurtful.”

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CHAPTER 4 Table 4.2 Some Values Common to the World’s Great Religions • • • • • • • • • • • •

The world is our family: “All are the sons and daughters of God.” Cause no harm: Be kind to others and hurt no one. Preserve the earth, keep the water clean, take only what you need. What we sow, we shall reap. Speak the truth and do not conceal it. Be guided by the spirit of the law more than its letter. Practice moderation in all things. Give to the poor, give from the heart, give without return. Be hospitable to strangers, for there really is no such thing. Wealth is a blessing that anyone can share. Avoid doing what you know to be wrong. Live in unity with all of humankind.

Source: Adapted from Moses 2001.

Confucianism: Tsze-Kung asked, saying, “Is there one word which may serve as a rule of practice for all one’s life?” The Master said: “Is not reciprocity such a word? What you do not want done to yourself, do not do to others.” Islam: “No one of you is a believer until he desires for his brother that which he desires for himself.” Judaism: “What is hateful to you, do not do to your fellow man. This is the entire Law; all the rest is commentary.” Christianity: “Whatsoever you wish that men would do to you, do so to them, for this is the law and the prophets.” And, “Love your neighbor as yourself.”

Not so different after all? There’s more. Aside from a universal rule about not causing harm and treating others as you want to be treated, most of the world’s religions offer strict prohibitions against murder, rape, incest, lying, stealing, and a variety of other behaviors that are detrimental to the social order and to the interests of individuals.10 There are positive values in common as well. Table 4.2 illustrates a number of other values and principles the world’s great religions have in common. These are only a few of the common elements that have been identified by scholars. The devil’s in the details, of course—there are major variations in to whom and under what circumstances these principles apply—but nevertheless, the prohibited behaviors are recognized as so harmful that rules must be made about them, and the encouraged behaviors are seen as essential to a high-quality human life in association with others.

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Superficial cultural and religious differences can easily obscure the fact that underneath it all, people living in different societies have the same concerns and worries, similar hopes and dreams, and the same need for broad rules that make possible a good life. Principles Come from Reason and Philosophy In science, principles are rules that cannot be positively proven but whose effects can be observed consistently—for example, the law of conservation of matter. Scientific principles are derived from continuous observation and are tested by experiments designed to prove them untrue. In philosophy, principles are fundamental truths arrived at by the rigorous use of logic. Take, for example, Kant’s criteria for principles of ethical conduct, derived from a lengthy and exhaustive exercise in logical analysis.11 Kant concluded that, in order to be ethical, a reason for acting must be: 1. universalizable, that is, applicable by anyone and everyone in a similar situation, and 2. reversible, that is, the actor would be willing to have the rule used by someone else even if the resulting action was detrimental to him/her. Kant extended this logic to demonstrate that human rights are desirable— because everyone wants what they have to offer, and inevitable—because it is ultimately recognized that no one has secure rights unless everyone does. Even more, Kant recognized the failings of human conduct and reasoned that, even though people often do not act on universal, reciprocal principles, we should all act as if we lived in a world governed by such principles, thus making it more likely that, over time, the principles will indeed prevail. Both the scientific and the philosophical examples demonstrate that principles can be deduced from logic or stated as an overarching explanation for some common behavior. These deductions and statements serve as the basis for many current attempts to define and assure guidelines for ethical conduct. Principles Arise from Social Consensus and Political Arrangement Standards of business conduct have been under intense scrutiny since at least the early 1970s, when consumer safety, environmental protection, and equal opportunity concerns came to the forefront of public consciousness in the industrialized world. More recently, with the emergence of truly global corporations larger than many nations, multilateral collaborative efforts to establish standards of conduct have been undertaken. Why?

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CHAPTER 4 Think about it. The spread of global capitalism may eventually float all boats, but its early outcomes have been quite mixed. Despite rising per capita gross national product in most developing nations, we don’t know yet how the wealth is distributed and with what effects. And, disasters, disease epidemics, and other serious challenges have accompanied capitalism’s expansion. Non-governmental organizations (NGOs) and global media have not been slow to highlight disasters such as Union Carbide’s Bhopal explosion in 1984, Nike’s reliance on sweatshops and child labor in the 1990s, and the exposure of Parmalat’s and Ahold’s financial houses of cards in 2003. The initial post–World War II effort to design universal principles is contained in the United Nations Universal Declaration of Human Rights (UDHR), passed in 1948. The UDHR can be thought of as a stretch-goal document for national governments, but more recently multinational corporations (MNCs) have been called to task to do their part to uphold human rights, and, indeed, their leaders are responding. In Table 4.3 are listed some of the major current efforts to develop worldwide standards of business conduct. Although substantial differences are apparent among these codes, and although each is purely voluntary, there is a surprising degree of consistency on the “big ideas” to which these codes subscribe: • • • • •

All people are entitled to basic human rights. All people are entitled to a measure of social justice. The natural environment must be protected and preserved. Economic opportunity must be extended to all the world’s peoples. Multinational corporations are powerful players on the world scene, and thus have an obligation to minimize the harms they cause and act to create positive benefits for all their stakeholders.

As a specific example of the principles included in such efforts, consider the Global Compact, an initiative of United Nations Secretary-General Kofi Annan in 2000. The Compact is to be considered “not as a substitute for effective action by governments, but as an opportunity for firms to exercise leadership in their enlightened self-interest.”12 Key areas relate to human rights, labor, environmental protection, and anti-corruption, and its ten principles are compiled from the UDHR, the International Labor Organization’s Fundamental Principles on Rights at Work, and the Rio Principles on Environment and Development13: Human Rights Principle 1:

Businesses should support and respect the protection of internationally proclaimed human rights; and

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Table 4.3 Major Efforts to Develop Global Codes of Conduct Asia Pacific Economic Cooperation Forum (APEC) Code of Business Conduct

http://www.apecsec.org.sg/apec html (for an overview of the code, see http://www.cauxroundtable.org/ APECForumBusinessCode of Conduct.html)

Caux Round Table Principles for Business

www.cauxroundtable.org/ principles.html

Global Sullivan Principles of Social Responsibility www.globalsullivanprinciples.org/ OECD Guidelines for Multinational Enterprises

www.oecd.org/dataoecd/56/36/ 1922428.pdf

Social Accountability’s SA 8000

www.cepaa.org/SA8000/ SA8000.htm

United Nations Global Compact

www.unglobalcompact.org

Principle 2:

make sure that they are not complicit in human rights abuses.

Labor Principle 3:

Principle 4: Principle 5: Principle 6:

Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced and compulsory labor; the effective abolition of child labor; and the elimination of discrimination in respect of employment and occupation.

Environment Principle 7: Principle 8: Principle 9:

Businesses should support a precautionary approach to environmental challenges; undertake initiatives to promote greater environmental responsibility; and encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption Principle 10: Businesses should work against all forms of corruption, including extortion and bribery.

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CHAPTER 4 Let’s make this simple list of principles even simpler. What’s being said here? Multinational corporations should: • • • •

uphold human rights in principle and in action, support labor rights and humane, equitable working conditions, engage in active protection of the natural environment, and resist dishonesty in themselves and others.

Whether principles are based on religion, reason, social consensus, political acts, or on some combination, when you boil them down to their essence, it’s not difficult to find a small set that can be applied universally: for example, respect human beings, protect the earth, cause no undue harm, give aid to the vulnerable, support honesty. Putting such values and principles into print may seem superfluous. But think what a difference it can make in corporate culture if the firm’s guiding value is “increase shareholder wealth” or “cause no undue harm.” Under the guidance of each, different things become possible and impossible, imaginable and unthinkable. And that is the central function of values and principles—to set the parameters for decision making and action. Codes of Conduct: What’s Covered? The code of conduct or code of ethics may be as short as a pamphlet or as long as the Tokyo phone directory. Regardless, a GBC code will contain language that helps employees find answers to four essential questions: • What are this company’s core values and guiding principles? • What must I do to be in compliance with law, regulation, and company rules? • For normal business functions or very specific vulnerabilities, what guidance is available when the rules don’t apply or are in conflict? • What channels exist for reporting, communication, and problem resolution? Core Values and Guiding Principles Before a code is ever written, the company’s top management team and board of directors, probably with the help of an external facilitator, need to decide upon and articulate the core values and guiding principles. Then, in the code, a succinct and prominent statement of core values and guiding principles helps to orient employees to the fundamentals upon which the code is based.

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Consistency between the big values and principles and the specific rules and guidance of the code is essential. Imagine the disillusionment and even chaos that could result if a company’s core values are respect, integrity, and ethical judgment, but its code of conduct is all about obeying local laws and doing what’s in the company’s short-term best interest! Thus, the code not only needs to restate the firm’s values and principles, but it should also reflect those values and principles at every turn. Compliance with Rules Compliance in codes of conduct has to do with the behaviors that are firmly required or firmly forbidden. Employees should know that if they do (or don’t do) these things, there will be consistent, fairly applied consequences. Every country in which the firm does business will have laws and regulations with which employees must comply. This is ordinarily a noncontroversial component of codes of conduct, although it may be difficult and complex to actually capture and interpret the details of local law. But there may also be national or local laws and regulations that are routinely ignored or subverted for any number of reasons, and the code needs to advise employees on what to do in such circumstances. It may be that locals themselves ignore the laws, as in the case of Italian tax negotiations, where the government assumes that companies will grossly understate their profits and will issue a tax bill based on a much higher estimate. The final tax bill results from negotiations.14 Or it may be that company employees are advised to follow a “higher” law. For example, during the apartheid regime of South Africa, very strict laws of racial separation forbade multinationals from promoting blacks or allowing them to live in “white” company compounds. As global pressure mounted on companies to challenge these policies, more and more firms began circumventing local law, appealing to a higher moral standard of non-discrimination. Finally, regardless of a country’s legal environment, a company may have firm rules of conduct that employees should know about. How employees are to comply with laws, regulations, and company rules needs to be spelled out in the code of conduct. For example, U.S. multinationals must comply with the Foreign Corrupt Practices Act of 1977 (FCPA) which forbids payments to high-ranking foreign officials but permits “grease” payments to facilitate or speed up services that would have been delivered anyway. Companies may spell out exactly the circumstances in which money can and can’t be paid to foreign officials, in compliance with the law. Or they might simply forbid bribery of any sort, choosing to override the FCPA with a higher standard of conduct.

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Exhibit 4.3 An Extreme Example of Ethical Guidance An extreme example of ethical guidance, as opposed to legal compliance, is found in Nordstrom’s well-known advisory to employees: “Use your own best judgment.”

Guidance Beyond Rules Employees need guidance on what to do when the rules or laws don’t apply, are inappropriate, or are in conflict. Such situations may involve the specific details of normal business functions or the vulnerabilities that are unique to the firm or its industry. For example, a company that makes extensive use of subcontractors should provide guidance on monitoring workplace practices on site to prevent violation of a principle against inhumane labor conditions in the manufacture of its products. A company whose processing requires use of very large quantities of water would contain code language on the value of clean water and policies relevant to specific plant locations and water supply. Channels of Communication Finally, employees need to be aware of how to report problems they observe and how to seek additional guidance when the written code does not address their concerns. Channels of communication should be spelled out in the code of conduct, even if they are as simple and straightforward as “report any wrongdoing to your supervisor.” Of course, it could be the supervisor who is doing the wrong! So, a code of conduct should reflect the organizational structures and processes that are available to report problems or violations, resolve conflicts or confusions, and redress grievances. A confidential 24/7 hotline or helpline has become standard practice in most large U.S.-based firms, and the idea may be catching on around the world. Table 4.4 lists typical categories that appear in business codes of conduct. Codes of Conduct: Temptations and Dilemmas The idea of temptations and dilemmas offers another way to think about the content of codes. Temptations are those situations where a person knows the

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Table 4.4 Typical Categories Covered in Codes of Conduct Accuracy of business records Alcohol and substance abuse Antitrust and competition Competitive information Compliance with laws, regulations, and company policies Conflicts of interest Customer relations Employee privacy Environmental compliance Equal employment opportunity Export control and import laws Gifts, favors, and entertainment Government investigations Government procurements Harassment Health and safety in the workplace Insider information and securities trading Marketing, selling, and advertising Outside business activities Political activities Product quality and safety Protection of confidential information Protection of intellectual property Purchasing practices Records management Reporting violations Retaliation Supplier relations Use of computer networks and information Use of corporate assets

Source: Ethics Officers Association. “Creating an International Management System Guidelines Standard for Business Conduct.” http://www.eoa.org/bcms.asp (accessed July 16, 2004).

right thing to do, but for some reason doesn’t want to do it. Dilemmas, by contrast, are situations where the right answer is ambiguous or unknown. Codes of conduct and policy statements, at their best, cover a company’s domain of temptations and provide for avenues to resolve dilemmas that are more difficult or complex. When a company develops a code of conduct for the first time, leaders may not be fully aware of the specific situations that employees typically encounter. A useful approach to identify an expanded set of ethical vulnerabilities is to conduct an ethical risk assessment with both internal and external stakeholder dialogue. Depending on the firm’s particular circumstances, risk categories that may show up include legal compliance, conflicts

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CHAPTER 4 of interests, stakeholder interests and harms, vulnerability to lawsuits, market vulnerabilities, or safety and environmental risks. In the paragraphs below we explain a bit more about some of these. Temptations to Benefit Personally Virtually every company has policies concerning conflict of interest, and for good reason. This is a very common type of ethical transgression in firms, where the individual has an opportunity to benefit at the expense of the work group or the entire organization. Typical conflicts of interest covered in codes include arranging contracts with businesses from which the employee or family members benefit, tending to personal business on the job, making personal use of company equipment or supplies, receiving gifts in exchange for particular purchasing arrangements, mingling personal and company funds and other assets, supervising friends and family members, or insider trading of the company’s or any partner’s stock based on nonpublic information. Non-compete clauses attempt to protect the company from employees’ taking confidential information and working for competitors. Company-specific conflicts of interest arise from the firm’s particular products, employee base, location, competitive strategy, and so on. National defense contractors, for example, are often dealing with classified information, political overlays to normal business decisions, and a workforce that may have strong military links. In addition to following their own code guidelines, they must abide by the government’s terms of engagement as well. Industry-specific conflicts of interest are those arising from the nature of the business and the competitive environment. Intel Corporation, for example, prohibits its employees from trading in the stock of future partner companies, where the upcoming partnership will be material to the market value of the partner. With this guideline, Intel is acknowledging that its market dominance can mean significant stock price boosts for its small partners, even though such partnerships may not alter Intel’s stock price at all. Temptations to Benefit the Department, Division, or Company These temptations will not necessarily benefit the individual, but are perceived to benefit the company somehow. Some examples include paying bribes to gain access to decision makers or to secure contracts or resources; giftgiving beyond company guidelines; obtaining and making use of confidential competitor information in bidding; hiding or falsifying information needed by partners to benefit one’s own group; and hiring retiring government officials primarily to obtain their privileged information or access.

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Stakeholder Harms A code of conduct and company policies need to acknowledge the major interests of the company’s stakeholders and the firm’s responsibility not to cause undue harms to them. Such acknowledgment makes it easier for managers and other employees to be forthcoming with questions, concerns, and information, and to tackle problems before they get out of hand. We will revisit these important issues in the upcoming chapter on stakeholder engagement. Many companies face temptations to hide, deny, or delay action on issues that are likely to affect some stakeholder group negatively. Sometimes the stalling results from fear or from failure to perceive the issue’s importance; at other times it is criminal negligence or outright criminal intent. Most often, though, it’s a matter of having to deal with too many things at once, and something important slips through the cracks. Codes can help to prevent such problems through clear statements of values that give managers a reason to act on what they know to be true. For example, workers in tropical climates may not like wearing safety gear such as masks, gloves, and rubber aprons. The gear is hot, sweaty, and irritating. The plant manager knows well enough that the workers have to wear the gear to be protected from harmful substances in the workplace, but he may put off dealing with the problem if the company’s code of conduct makes little or no mention of worker safety as a core value and then does not spell out the procedures to be followed and the consequences of ignoring them. Novel or Unexpected Vulnerabilities In a turbulent environment, new developments can quickly change the risk profile of a company, and this may require changes in the code of conduct and policy statements. Although codes should be relatively stable so as to provide consistent guidance, they will have to accommodate changing circumstances, technologies, labor conditions, and much more. Policies, of course, are subject to revision as the environment changes. Technological developments certainly cause new risks. For example, Internet privacy concerns were simply not an issue for companies in the 1980s, because the Internet was at that time primarily an arcane tool for military programmers. Now, however, privacy issues have exploded, and companies find themselves needing to reassure customers, employees, and other stakeholders that web-based information is secure and not subject to misuse. A code statement of respect for privacy, backed up by specific policies governing information access and use, is now essential.

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CHAPTER 4 Unexpected vulnerabilities often arise when companies enter new parts of the world. Western firms rediscovered the critical importance of infrastructure—physical, social, and legal—when they began doing business in Russia and the countries of Eastern Europe in the early 1990s. With local governments in shambles or in deep transition, who was responsible for maintaining physical infrastructure? (No one.) How many years would it take to get phone lines installed? (Perhaps ten.) When was a deal finished? (When the money was really transferred.) How was property ownership determined? (Often by simple seizure of state-owned assets.) Why did workers go stonyfaced when Western managers talked about the human resources department? (Because the department had been an arm of the Communist Party.) Traditional tools such as political risk assessment can be useful here in uncovering vulnerabilities that should be included in the code of conduct and in policy statements. Beyond this, however, the code and policy should help managers understand the ambiguities and uncertainties they will face, and should provide avenues for reconciling them with good business practice. At first this may involve a simple statement that the in-country manager needs to communicate with headquarters experts for guidance about how to handle unexpected vulnerabilities. Later, as in-country managers learn what challenges they face, specific policies can be developed to address their needs. What Does a GBC Code Look Like? If one wants to determine whether a company is a global business citizen or not, the first place to look—but not by any means the last—is the company’s code of conduct. Codes of conduct are becoming pervasive in large firms headquartered in developed nations, and there is no longer any distinction in merely having a code. Furthermore, codes can be designed for many reasons and be intended to fulfill various types of goals. For example, a code can be image-building to external parties without reflecting true corporate identity, as Enron’s code so amply demonstrated. Finally, and most importantly, a code of conduct cannot by itself encourage or enforce ethical performance if the essential supporting policies, procedures, and consequences are damaged or missing in the organization or the society.15 The proof is in the pudding—the actual language of codes may be very similar or even identical, but how the code is presented, interpreted, incorporated into policy, and emphasized over the long term, and whether sanctions are known, consistently enforced, and fair, will make a huge difference in whether we are looking at a GBC company or not. Nevertheless, we suggest just a few key attributes that are likely to be observed in the codes of GBC companies:

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Table 4.5 Attributes of GBC Language in Codes of Conduct Attribute

Components

Orientation

• A simple expression of universal values • Identification of key stakeholders, including those involuntarily affected • Sensitivity to cultural differences • Attitude of “extra-legal” compliance—going above and beyond the law

Implementation

• Clear identification of specific situations that are likely to arise in this industry • Guidance on what to do when the code is in question or when the culture demands adaptation • Support for employee ethical development • Support for structures, systems, and processes that facilitate ethical decision making

Accountability

• Emphasis on stakeholder engagement • Transparency of reporting • Independent assurance—verification of information, openness to monitoring

Source: Logsdon and Wood 2005.

• Comprehensiveness—the code and its policies cover a broad scope of issues and are applicable in every place where the company does business. It covers supply chain responsibilities as well as direct company actions, and takes special note of stakeholder interests and possible harms. • Language—the code and policies contain orientation language that sets the stage for behavioral expectations in the company’s values; implementation language that makes explicit how decisions should be made; and accountability language that promises employees and other stakeholders access to information they need to meet their interests. • User-friendliness—the level of detail contained in codes and policies is less important than the ease of use. Regardless of length or detail, the code and policies should be readily accessible to everyone in the organization, easy to comprehend, and unambiguous. Users should know how to move to the next step, should they need clarification or more information. It might be useful to say a bit more about the language of GBC codes. Table 4.5 lists a number of specific characteristics to look for in a company’s orientation, implementation, and accountability language, and a few of these components are illustrated with text from the codes of global companies.16

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CHAPTER 4 Identification of Key Stakeholders Most companies will acknowledge certain responsibilities to investors, employees, customers, and suppliers. A GBC company, however, will go beyond these core economic stakeholders and explicitly identify communities, host countries, and other stakeholders who may be involuntarily harmed by the company’s actions. Shell, for example, spells out five core groups: Shell companies recognize five areas of responsibility: to shareholders, to customers, to employees, to those with whom they do business, and to society. . . . These five areas of responsibility are seen as inseparable. Therefore, it is the duty of management continuously to assess the priorities and discharge its responsibilities as best it can on the basis of that assessment.

ConocoPhillips includes a very general stakeholder acknowledgment without naming any particular stakeholders: We are ethical and trustworthy in our relationships with all stakeholders.

Novartis (at its website, www.novartis.com/corporatecitizen) makes a general statement and a specific list: We care about the expectations and concerns of our stakeholders. We recognize the interest of our shareholders, employees, customers, neighbors, the authorities, and the public at large in our societal behavior, and the health, safety, and environmental impacts of our business.

Guidance on Resolving Questions and Conflicts Employees need to understand how to implement a code of conduct on the ground, day to day. It is important, then, that a GBC code contain language that clearly guides the employee through the decision and action process. Shell, for example, makes a very general and easily located statement on bribery, but then makes it difficult for employees to find specific guidance. One must dig through several layers of the website with little or no mapping in order to find specific language on how to resolve questions and conflicts about bribery: The direct or indirect offer, payment, soliciting and acceptance of bribes in any form are unacceptable practices.

BP, while also having several layers of instructions on bribery, makes a clearer, more accessible, and more complete statement of how the employee should respond to a bribery situation:

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BP will never offer, pay, solicit or accept bribes in any form, either directly or indirectly. This includes those transactions formerly known as facilitation payments. Any demand for or offer of a bribe in whatever form to any BP employee must be rejected and reported immediately to line management.

Designing for Buy-In Developing a code is the first step in global business citizenship, but it’s all for nothing unless there is buy-in. Buy-in doesn’t happen all at once, and it doesn’t happen because a code has been written or because consultants design a snazzy roll-out. Consider these examples: • Manager Pryor receives his company’s code of conduct from the CEO, who is leading an all-day workshop on ethics, compliance, and the code of conduct in practice. • Manager Rao receives a copy of her company’s code of conduct from the legal department with a note that says, “Please sign and return this receipt indicating your acceptance of these principles and policies and your willingness to abide by them.” • Manager Tsu receives his company’s code in the mail, but unfortunately he does not understand English very well, so he puts it in a desk drawer and goes on with business as usual. Which company do you think really means it? Which has the best chance for widespread buy-in? Lead by Example No matter what’s written in the code, no matter what structures are in place, the firm’s leaders with power and authority have to be viewed as acting well above any minimums required of their employees. There should never be a question of the CEO using a company plane for a family vacation, if the company forbids the private use of corporate assets. If conflicts of interest are spelled out, the CFO should never be making sweetheart deals with her cousin’s accounting firm or hiring her spouse as a high-paid consultant. Executives have to be above reproach, modeling and reinforcing the behavior that the code demands of everyone. Try Harder to Communicate Companies have to work to communicate a code as if they really mean it. Johnson & Johnson never has a management training session without making

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CHAPTER 4 reference to the values of the Credo.17 BP offers analytical information on how its 24-hour helpline is being used, allowing managers to see that this medium of communication is valued and alerting them to the types of issues that typically arise. For multinationals, it is particularly important to acknowledge the many languages that employees may be using and to ensure that every employee has access to code guidelines in a language that s/he understands well. Put the Structures in Place How much change will be needed to make a code of conduct work? A great deal depends on what type of organization it is, what the leaders intend, and what kind of trust exists in the workplace already. We will revisit these issues in upcoming organizational change and implementation chapters. For now, let’s briefly review the kinds of things that are needed to make a code of conduct work.18 Assignment of Responsibility Putting a secretary or a mid-level staffer in charge of the firm’s ethics program will not show the kind of commitment needed for buy-in. A high-level line manager, preferably the CEO or a direct report, should have responsibility for promoting ethical conduct. Large U.S. firms are often dedicating a high-level position as Ethics Officer, and the Sentencing Guidelines of 2004 virtually mandate this approach.19 In addition, an ethics committee of the board of directors can add credibility, and may even participate in developing the code. A visible chain of command for reporting and decision making can ensure that all employees take ethics seriously. Regular Training Every employee of the company needs to have a personal and understandable introduction to the code of conduct and the enforcement structures. New employee orientation is an ideal spot to build in this initial contact with the code. Managers need more exposure and a chance to practice ethical decision making and compliance with guidelines, so regular training and refresher sessions should be built into the manager’s annual routine. Managers also need practice in sorting through the challenges they think they might face in trying to live up to the code. And, as new issues and problems arise, training is needed to help employees at all levels grasp and wrestle with the company’s changing ethical environment.

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Communication Channels What happens at the top is important, but ethical conduct is more than a topdown phenomenon. All employees need secure and trustworthy access to communication channels whereby they can report problems, ask questions, and seek guidance on tricky issues. Many large companies are making extensive use of helplines (formerly called hotlines), where employees can call 24/7 to leave anonymous or confidential messages. Other vehicles include newsletters and on-line chatrooms, ombudspersons to whom an employee can turn for personal advice on ethics issues, and up-the-line reporting and problem-solving. Incentives It may seem silly to talk about incentives in the same breath as doing the right thing. But think about it—if managers are exhorted to manage ethically, and their entire incentive and compensation system is built on direct and measurable contributions to profit, won’t there be a great many temptations to slip over the ethics edge to boost this quarter’s financial results? Indeed, this situation guarantees the “conflict of interest” risk identified earlier. Building ethics and compliance into management evaluation processes is an essential step for a GBC company. For example, 360-degree reviews can ask a manager’s reports, peers, and superiors to comment on his/her ethical leadership along with other attributes to be evaluated. In addition, codes of conduct need to be aligned with corporate succession planning and performance management systems to ensure that criteria for salary, bonuses, and consideration for promotions are aligned with the company’s core values and principles. Enforcement It goes without saying that a code of conduct and its policies must be enforced if the company is serious about ethics. Consequences for violations should be clearly communicated in advance. Punishments should fit the crimes, and there should be no favoritism or status-based exceptions. This does not mean that enforcement should be rigid or exactly the same in every situation. There will be times when humane considerations or cultural circumstances require variations, and these variations must be explained so that they are perceived as fair and reasonably consistent. The Biggest Mistakes in Codes of Conduct Getting it right—developing and implementing codes of conduct and policies that actually offer appropriate guidance—can be tricky. There are several

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CHAPTER 4 traps that even the most sincere companies can fall into. Take a look at five of these pitfalls that GBC companies especially want to avoid. “Founderitis” An organization’s life cycle stage can be an important factor in its ability to adopt and enforce a GBC code and policies. Companies that are still founderled, or are one generation of management from the founder, are likely to reflect the founder’s strong values, that may or may not contain a reasoned and comprehensive set of universal principles. The problem here is that what is required to make a start-up flourish may be quite different from what is needed to sustain a large multinational enterprise. “Do what it takes,” for example, may be a practical value for a new and struggling company, if everyone understands the ethical limits of the statement. But in truth, and certainly for a more established and far-flung operation, this value is an ambiguous and faulty guide for action and all too easily leads employees to cheat, lie, hide, and deny, all in the name of “whatever it takes.” “Founderitis” can also be a mistake in reverse, often when growth firms go public. That is, a company founded on strong values may find itself pressured to dump those values when a new generation of management takes over. One thinks here of H.B. Fuller Corporation, whose board eventually rejected the strong social service values of its founding family, or even of Levi Strauss Corporation, which resisted similar demands and upheld its values even as competition forced changes in its practice. For a GBC company, the founder’s values represent a data point for thoughtful analysis. They shouldn’t be written in stone, but neither should they be summarily abandoned. Selective Exclusion Many companies have gotten the initial message about values and principles, but their choices reflect the views or desires of top management, or the strategic direction of the company, and do not offer a comprehensive set of universal standards. Oil company TotalFinaElf, for example, lists these as its core values: “professionalism, respect for employees, an ongoing concern for safety and environmental protection, and a commitment to contribute to the development of host communities.” Without further elaboration, these values could be seen as admirable but incomplete. However, the company goes on to assert its commitment to the principles of the United Nations Universal Declaration of Human Rights, the Organization for Economic Cooperation and Development (OECD) guidelines for multinationals, and the International Labor Organization (ILO) standards concerning child labor.

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By reference to these comprehensive statements of principles, TotalFinaElf avoids the trap of selective exclusion. Compliance Orientation A great many U.S. companies have developed codes intended to provide little more than legal and regulatory check-offs for managers. For a GBC company, this approach is insufficient. Legal compliance is certainly important, but it should not be the only, or perhaps even the primary, emphasis of a code of conduct. Rather, a code and its policies offer guidance on behavioral expectations beyond the law. Compliance alone will not help a company manage its stakeholder relationships effectively or keep it from being blindsided by developments in the larger environment. Furthermore, when the lawyers take charge of the company’s response to challenges, important avenues of problem resolution, relationship-building, and information transmission are closed off.20 Bragging You’d think a GBC company would really have something to brag about, and actually, this might be so! A danger here is that the image management folks take charge of code and policies, and then what was meant as a guidance system becomes instead a bundle of pretty posters, flashy brochures, and press releases. Understand, there’s nothing wrong with letting the world know when things are going right. But, regardless of how many colors are used in their publication, the code and policies have to be accessible to those on the ground and usable in everyday decision making. Another danger with bragging is that the media and many NGOs are all too ready to snap up a sound bite from a company website or press release and use it for their own purposes, regardless of the context, the company’s intentions, or the actual outcomes. We saw in an earlier chapter that many executives are gun-shy of media attention, and understandably so. Adopting a code of conduct and implementing policies is serious business with plenty of room for experimentation, mistakes, and learning. GBC companies have to be careful, therefore, to maintain good relationships with NGOs and media who may misuse their code/policy information. All Talk, No Action We can’t emphasize enough that a code of conduct and its accompanying policies are useless if they are not widely known throughout the firm, used in

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CHAPTER 4 decision making, and enforced through incentive systems and sanctions. In upcoming chapters, we explore these implementation issues. Conclusion A GBC company will base its code on a small, reasonably comprehensive set of universal principles. Such principles can be discovered through religion, philosophy, or social and political agreement, and their adoption helps companies to avoid the severe risks of cultural and ethical relativism. A comprehensive code will spell out once again the company’s core values and guiding principles, provide specific rules of law and company policy, offer guidance in situations that may be ambiguous or conflicting, and specify how employees can report incidents and seek clarification. The code’s specific content will depend to a large extent on the company’s exposures because of location, industry, nature of workforce, or inherent commitments. The language of a GBC code will contain specific statements of orientation, implementation, and accountability. Buy-in, that crucial step of spreading ownership of and commitment to a code of conduct, requires that executives lead by example, communication channels be open and fluid, and the necessary structures be put into place— training, evaluation, incentive systems, and enforcement that is systematic and fair. Effective implementation of a code can be all too easily prevented by “founderitis,” selective exclusion when choosing values and principles, a strict compliance orientation instead of a focus on employee judgment, bragging, and faking it by being all talk and no action. A GBC company’s code of conduct does not need to be complicated. It does, however, need to be value-based, clear, and sincere. A code of conduct is necessary but not sufficient to help a company behave ethically. Especially for large companies, where the top manager is not in direct contact with most employees, a code and its policy statements provide guidance, but the real challenges lie in making it work day in, day out, in all of the company’s locations. Developing a workable code and accompanying policies is a significant achievement to be celebrated; the company now has a guidance system that serves as a foundation for both routine and extraordinary decision making. But there is more to be done.

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The Principle of Accountability and Processes of Stakeholder Engagement —————— ————

Accountability is built into the fiber of publicly held corporations. Every manager quickly learns how to be accountable to those a step or two up the hierarchy. Every CEO and CFO knows how to be accountable to capital providers and financial regulatory agencies or suffer stiff consequences. But global business citizenship requires a fresh look at the principle of accountability and the many ways to engage stakeholders for organizational success. Accountability provides the basis for stakeholder decision making, and, as such, is a fundamental responsibility of the organization to all stakeholders who are significantly impacted by its existence. GBC accountability goes beyond conventional one-way communication outward to a continuous process of engaging with and responding to stakeholders in order to develop and maintain trust over the long-term: GBC accountability is the principle of acknowledging and responding to the legitimate interests of stakeholders and society by learning what information stakeholders need and want, and by communicating information about the economic, social, and environmental impacts of the organization’s performance to those who have a right to know.

GBC accountability requires a “look, listen, and learn” approach to stakeholders. If the company is simply providing minimum information required

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CHAPTER 5 by regulatory agencies or a stock exchange, its managers probably aren’t learning how well the company is meeting stakeholder needs. Nor does the organization get feedback from stakeholders about how useful or appropriate reported information is to stakeholders, or what else they might need to know to make their own informed decisions. Stakeholder-focused dialogue and information systems attempt to determine who needs to know what, what needs to be done, and what progress has been made to address the expectations and objectives of multiple stakeholders. Remember, addressing stakeholders’ legitimate interests involves more than providing information. It also means interpreting stakeholder dialogue and making the necessary organizational changes in order to be trusted by stakeholders. In this chapter, we focus on who these stakeholders are and how to engage with them. Chapter 9 will develop ideas on how to measure impacts on stakeholders and report information to them. Accountability: An Overview The components of accountability for a GBC company include stakeholder engagement, organizational responsiveness, compliance, transparency, assurance, learning, and innovation. So how do these components enable GBC? Only through stakeholder engagement can the organization learn what is expected of it. Responsiveness is the essential illustration to stakeholders of the extent to which the organization has taken their expectations and concerns into account and to what extent it has incorporated stakeholders into its organizational and decision-making processes. Compliance demonstrates organizational commitment to good citizenship by abiding by local, regional, national, and international regulations and ethical norms. Through transparency, the organization reveals the impacts of its behaviors on its stakeholders and thereby builds trust in the intention to do right by them; it also reveals stakeholder-relevant internal processes such as governance mechanisms and worker safety procedures. By providing independent verification and assurance of the data it reports, the organization provides external validation to external parties, which enhances trust. When it institutionalizes learning and innovation, the organization translates the totality of accountability components into meaningful organizational change towards alignment of organizational behaviors with prevailing stakeholder expectations and societal well-being. Global business citizenship requires accountability—exceeding levels heretofore practiced by contemporary business organizations. As the GBC model articulates, experiments to address Step 3 problems—those experiments being perhaps the riskiest of ventures to corporate reputation and

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maintenance of social capital—are not possible without ongoing dialogue and true two-way communication with stakeholders. Furthermore, GBC requires accountability to accomplish the linchpin of sustainable competitive advantage—continuous learning and innovation. So if GBC companies are to be accountable, to whom is accountability owed? Shareholders and other investors and capital providers have a claim on financial performance and information regarding it. Employees, suppliers, customers, communities, and governments have all laid claim to various other aspects of company performance. Yet beyond these well-established stakeholders, companies are now being challenged with the demands and interests of a host of additional stakeholders, including economically or socially marginalized people (poor, handicapped, illiterate, non-Englishspeaking, non-Western, under-age) and future generations. Although NGOs often claim to speak for such groups, in fact they are not being considered in any systematic way in most companies’ decision-making processes. Nevertheless, they are the stakeholders most likely to be involuntarily harmed by a company’s actions, and thus companies do have a moral responsibility to include their needs and interests in planning and operations. To be clear, GBC does not require companies to solve the problems of world poverty and ignorance. But if a company is taking the land that native peoples require to feed themselves, or is polluting the only water supply in a region, or is putting employees in danger with old technologies that are upgradeable, then GBC does require attention to these kinds of specific consequences as well as accountability to the affected stakeholders. Each distinct group of stakeholders is part of the greater society whose interests focus on environmental issues, social issues, and standard of living issues. The extent to which the economic, social, and environmental expectations of society can be met is largely driven by, and in turn drives, the financial performance of business. The importance of accountability to all stakeholders is becoming increasingly apparent as business comes to understand how the responses of one constituency directly and indirectly influence organizational performance. In Exhibit 5.1, Ford’s accountability statement appears as an illustration. We have to point out that stakeholders sometimes have interests and demands that are not legitimate or not essential for the company to address or meet. For example, companies aren’t required to reveal proprietary “secrets” unless the public is endangered and no other action will protect it. Managers don’t always get it right, but then, neither do stakeholders. A rational accountability process will contain evaluative steps to assess whether stakeholders are demanding information the company can and should legitimately provide.

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Exhibit 5.1 Ford’s Statement of Accountability We will be honest and open and model the highest standards of corporate integrity. We will achieve this by: • Being responsive to stakeholders’ concerns on the impact of our operations, products and services through public disclosure and regular reporting; • Making accurate and forthright statements, competing ethically, avoiding conflicts of interest and having zero tolerance for the offer, payment, solicitation or acceptance of bribes. Source: Ford Motor Company 2003, p. 12.

Figure 5.1 displays the accountability model of the Institute for Social and Ethical Accountability (ISEA), a nonprofit organization that has been involved in developing voluntary standards for accountability processes. In the ISEA model, accountability is possible only if stakeholder engagement processes are embedded in corporations so that relevant performance data are routinely reported to those who need to know. GBC incorporates and builds on the ISEA model in order to implement the essential four steps of: (1) values embedded in a code of conduct, (2) local implementation, (3) analysis and experimentation, and (4) organizational learning. Having introduced the principle of accountability essential to a GBC company, the remainder of this chapter focuses on the nature of stakeholder engagement and tools to make such engagement and dialogue successful and organizational responsiveness effective. We address the other specific components of accountability in later chapters: compliance, transparency, and assurance in chapter 9; and learning and innovation in chapter 11. Stakeholder Engagement Dealing with selected stakeholders is a commonplace function in all business organizations. And virtually all large firms have a formal spot on the organization chart for investor relations, customer relations, employee relations, and community relations, to name a few. What does the idea of “stakeholder engagement” offer that’s really new? True, many companies have these functions, but they are often silos, lonesome outposts of staff rather than line responsibility, where there is little

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Figure 5.1 ISEA’s Accountability Model

Accountability

Pe rma rfo

Inno va tio n

Accounting

nce

Embedding

Reporting

Assurance

L ea rnin g

St

ake

e h ol der E ng ag e m

nt

Source: http://www.accountability.org.uk/uploadstore/cms/docs/AA1000 %20Framework%201999.pdf page 27 (accessed January 6, 2005).

communication across these stakeholder functions, and little reporting upward to a senior executive in charge of reputation management. This “elephant” of separate stakeholder responsiveness practices leaves practitioners in these various functions touching different parts of the stakeholder set without full information and cooperation to do their jobs as effectively as they could. Organizational stakeholders are valuable sources of strategic and operational learning. GBC companies find it necessary to achieve a high-level dialogue with those with whom the organization must interact in order to learn how best to solve ordinary operational problems, cross-cultural differences, and code implementation issues in a sustainable way. While the conventional business model is likely to focus on “managing stakeholder relations” for the firm’s explicit benefit, the newer idea of stakeholder engagement emphasizes the nurturing of ongoing dialogue and the development of trust. Partners in a trusting relationship do not always demand quid pro quo, but are

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Exhibit 5.2 The AccountAbility 1000 (AA1000) framework provides a systematic stakeholder-based approach to accountability by providing standards to manage and communicate accountability initiatives: Planning • Establish commitment and governance procedures • Identify stakeholders • Define or review values Accounting • Identify issues • Determine process scope • Identify indicators • Collect information • Analyze information, set targets, and develop an improvement • plan Auditing and reporting • Prepare report(s) • Audit report(s) • Communicate report(s) and obtain feedback Embedding • Establish and embed systems Source: Institute of Social and Ethical AccountAbility, 1999b.

confident that, over time, the relationship will be mutually beneficial. The AA1000 process standard, developed by ISEA, has this to say1: [A]t the end of the day, stakeholders will develop trust in organizations, and will be willing to continue investing their time and effort only in those who are transparent, responsive, and who make decisions that take stakeholder needs into account.

Which Stakeholders Need to Be Engaged? It’s a deceptively simple but challenging question. A narrow definition of stakeholders focuses on individuals and groups that are directly relevant to the firm’s core economic interests. These are easy enough to identify— customers, employees, investors, suppliers. Obviously a company’s viability depends on staying engaged with these stakeholders, and indeed the “stakeholder relations” functions common in firms relate to just these groups.

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WBCSD Stakeholder Attributes and Engagement Objectives

High High

Level of influence

Keep satisfied

Low Low

Focus efforts

Respond to requests

Keep informed

Level of interest

High High

Source: World Business Council for Sustainable Development 2003, p. 17.

The World Business Council on Sustainable Development (WBCSD) developed a simple matrix to identify and categorize stakeholders by their level of influence on the organization and on their interest in the issues relevant to the organization, shown in Figure 5.2. This model can be a useful first step to decide how to proceed on an issue, depending on who is interested in it and who can influence the outcome. But something important is missing. See if you can tell what it missing by looking at the following set of stakeholder characteristics, developed by Mitchell, Agle, and Wood.2 • Power: Does the stakeholder have the ability to influence the firm against its will? • Legitimacy: Does the stakeholder have legitimate standing with respect to the firm, or does it have a legitimate issue or interest related to the firm? • Urgency: Does the stakeholder have an urgent claim with high-magnitude consequences requiring immediate response?

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CHAPTER 5 The addition of legitimacy expands the manager’s perspective on which stakeholders need to be engaged. Now consideration of the stakeholder set expands to include: • Stakeholders who don’t know about issues that are relevant to their welfare, for example, neighbors of the plant who are unaware of pollutants or potential hazards from the plant’s operations. These stakeholders have interests in the firm’s performance, but no knowledge that their interests are threatened. • Stakeholders without a voice to express their interests, for example, poor workers in subcontractor sweatshops (absence of power or influence). Legitimate stakeholders therefore can include those who lack awareness or knowledge of their interests and those who lack power because they are somehow marginalized. GBC companies choose to engage legitimate stakeholders regardless of their knowledge or power because of moral commitments (e.g., cause no harm) or because of their long-term perspective on the troubles that can arise from untended stakeholder needs. Frankly not all stakeholders are cooperative, or accessible, or trustworthy. We must acknowledge the reality of cheaters, liars, thieves, con-artists, and the violence-prone. The GBC company will engage its legitimate stakeholders in counteracting these pests, and will keep on keeping on, trying to interact with all their important stakeholders in transparent and honest ways. And we need to consider the voiceless, and to judiciously scrutinize those who claim to represent them. For example, a company may be attacked by an activist group claiming that forced labor is used in the firm’s supply chain. The firm might correctly claim that the activist group is not a legitimate voice for labor, or that it’s attacking for its own selfish purposes, but the issue of forced labor may indeed be legitimate. The company would be wise to address the issue and to treat the activists with respect, even when they don’t seem to deserve it. Even if the messenger is problematic, the message may be quite valid. Figure 5.3 illustrates the relationships among these three attributes and the types of stakeholders that result described in Exhibit 5.3. Mapping organizational stakeholders onto the stakeholder salience model is useful to plan how best to target stakeholder engagement initiatives, and to design the appropriate interventions for different groups. Logically those core stakeholders who exhibit all attributes—legitimacy, power, and urgency— should be identified first for appropriately significant engagement programs. But after that obvious step, what next? GBC companies can benefit strategically by carefully considering stakeholders whose issues would be urgent if their knowledge about firm impacts was complete. It could prove to be of significant advantage, for example, to a firm that created local good will by providing a solution to a future community transportation problem before 90

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Stakeholder Salience Model: Who Matters to Managers?

Legitimacy

CORE STAKEHOLDERS

Power

Urgency

Source: Mitchell, Agle, and Wood 1997, p. 4.

the firm expanded its facilities. Of course, the stakeholder diagram will change with time and circumstance, so stakeholder mapping is an ongoing need. We certainly acknowledge that in lean economic times, when companies are downsizing and squeezing out maximum efficiencies, it is difficult to think about how to use company resources for stakeholder engagement. Many companies simply do not believe they have the bandwidth for such a commitment. Managers go to the office each morning and step into a blender full of pressing tasks that shove out any attention to longer-term issues. The point of GBC, however, is that stakeholder engagement is not a luxury or an option. It is an essential component of business accountability. If you’re going to be a player on the global field, you need to have the right equipment. Once the stakeholder targets are identified, it is important to choose and persuade the “right people” both inside the organization and outside to participate. Engagements are far more likely to be successful if participants themselves legitimize the effort. It may be difficult to attract representatives for important groups if they are not well-organized, but it will best serve to ensure that the full range of views within a stakeholder group is reflected and that a legitimate outcome is possible by paying close attention to whom to include. 91

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Exhibit 5.3 One Size Does Not Fit All Stakeholders The stakeholder salience model developed by Mitchell, Agle, and Wood (shown in Figure 5.3) is a handy way to think about how managers are likely to respond to certain kinds of stakeholders. The question is, Which stakeholders are going to get managers’ attention in what circumstances? In the model, stakeholders with two or all three of the key attributes are the ones most likely to have management’s ear. The four types are these: • Dominant stakeholders have legitimacy and power. They are best represented by “the usual suspects” in stakeholder analysis: investors, employees, customers, suppliers, government, and communities. Organizations tend to be structured to accommodate the needs and interests of these stakeholders, and so the relationship are routine and ongoing. • Core stakeholders are dominant stakeholders (with legitimacy and power) who also have an urgent issue that they want the firm to address. Because of their ongoing relationship with the firm, they are likely to voice their issues and to expect prompt action. Managers generally need to pay attention when core stakeholders develop urgent claims. • Dependent stakeholders have legitimacy and urgent claims, but have no power to influence the firm. An example might be a local charity that gives the working poor access to health clinics. Such an organization could well be on management’s stakeholder radar screen, but the balance of power is strictly one way. • Dangerous stakeholders have urgent claims and power, but no legitimate standing. Terrorists—or freedom fighters, depending on your perspective—might qualify. It seems odd that managers would give such groups any recognition at all, but it is clear that most large multinational firms now train their executives on how to respond to kidnappings, bomb threats, sabotage, and other acts of violence against the company or its people. Less likely to get and hold managers’ attention are the stakeholders who possess only one of the key attributes: • Discretionary stakeholders have legitimacy, but no power over the firm and no urgent claims on it. These are stakeholders the firm may choose to be in relationship with, and those relationships may

(continued)

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be very beneficial, but there’s nothing compelling about them. A company’s contributions to a local symphony orchestra might be an example. • Latent stakeholders possess power to influence the firm, but they have no legitimate standing and no particular reason to use their power. These stakeholders are most likely to surface when managers engage in “what if” brainstorming or scenario-building exercises. The firm may have some policies and procedures for dealing with them if and when the time comes, but they’re not likely to be high on managers’ priority lists. • “Mosquitoes” are stakeholders who have urgent claims on a firm, but have neither legitimate standing nor power to influence the firm’s behavior. Managers are very unlikely to pay attention to “mosquitoes” unless their claim is taken up by powerful, legitimate others. And this brings us to a final point about the stakeholder salience model: It is dynamic. Some types of stakeholders are going to be relatively stable. There will always be employees, investors, customers, and suppliers. But their relative weights will shift over time and with issues. And, discretionary, latent, or merely irritating stakeholders may discover that the key to meeting their needs is to align with core or dominant stakeholders—and that can spell big trouble for managers who haven’t been paying attention to their stakeholder networks.

How and Where Do We Engage Our Stakeholders? What constitutes the appropriate venue, tool, and process for a stakeholder engagement initiative? It depends. When multiple parties representing multiple points of view address issues of complexity, the task may quickly overwhelm the best intentions. Several important factors influence the “how” of stakeholder engagement. Which Stakeholders Will Be Included? And Does This Depend on the Issue or Goal? When a single, homogeneous stakeholder group is to be engaged (say the employees of an organization are going to give input into quality of work life issues), the appropriate process might be a simple survey given in the workplace. On the other hand, when suppliers for a multinational corporation are to be engaged in workplace practices of the supply chain, involving many geographic areas and diverse cultures, a multi-stakeholder design should take

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CHAPTER 5 into account the increased complexity of the engagement and utilize tools that take culture, language, and other relevant factors into account. How Are Cultural Differences Accommodated in Stakeholder Engagement? Discussing the challenges faced by multi-stakeholder designs, Susskind et al. examine the alternatives of simultaneous translation (expensive, and sometimes an obstacle to joint problem-solving), distribution of (translated) written materials (may cause different stakeholders to come away with slightly different conclusions about outcomes), and face-to-face dialogue (difficult for some groups). They conclude that multi-stakeholder dialogues are built on the premise that dialogue and deliberation best encourage problem-solving, but that there can be difficulties in any format when the stakeholders are culturally diverse.3 How Diverse Are the Stakeholder Perspectives? A labor union is an example of a relatively homogeneous group, sharing views on the issues that affect the typical worker: wages, health care, workplace safety, retirement, and the like. Alternatively, consumers for a petrochemical company would include individuals and industrial consumers, wholesalers, and retailers—a heterogeneous mixture of self-interests and political perspectives. How Complex Are the Issues? Take the example of environmental protection. Biodiversity, ecosystem balance, global warming, pollution, weather patterns, and so on make for an extraordinarily complex issue that no single company could possibly solve. Multisector collaboration, including multi-government action, is essential to coordinate the many and complex stakeholders involved in this issue. However, if the issue is a particular company’s environmental footprint and what it can do to lessen impacts, then the issue can be measured, evaluated, and dealt with via more contained stakeholder engagement processes. Even simpler, if the issue is a company’s recycling, then very specific measures can be taken to address the problem and, perhaps, it is only the employee stakeholder group that really needs to be involved. What Are the Resource Constraints on Engagement? Stakeholder engagement isn’t costless. Even a simple survey involves datacollection and analysis that take time and money. Multi-stakeholder dialogues

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are more expensive, and an international platform increases the price tag exponentially. Obviously it is essential to prioritize engagement initiatives according to the power, urgency, and legitimacy (or the level of influence and interest) of the stakeholders involved and issues to be tackled. Limited funds can seriously hamper the quality of the process, making legitimate results difficult to achieve. Basic Approaches to Stakeholder Engagement True stakeholder engagement aims to give multiple viewpoints voice in a decision-making process. However, the degree to which stakeholders are actually engaged ranges broadly from simple data-gathering techniques, such as surveys or interviews, to major multi-stakeholder processes that focus on issues. The techniques cover a broad spectrum of structure and levels of engagement, from data-gathering to consensus-building and collaboration, and at the local, national, or global level. At the most basic level, a firm gathers information from its stakeholders via written surveys or focus groups. Data-gathering of this sort is quick, easy, and cheap, but too often remains a one-way feed that benefits the firm without payoff for stakeholders. While such data-gathering can be easily accomplished at local and national levels, it does nothing to build trust between a firm and its stakeholders without careful attention to responsive feedback. The British telecommunications firm, BT, reveals an array of basic stakeholder engagement practices in Exhibit 5.4. More Complex Approaches to Stakeholder Engagement Global business poses tough dilemmas that are best suited for a broad-based approach to problem-solving that involves multiple constituencies. ABB Ltd., headquartered in Zurich, began its stakeholder engagement process by talking with national and international NGOs, trade unions, central and local governments, academics, media, religious groups, and the business community in order to navigate the uneven ethical terrain in their multiple locations.4 Some really tough questions arose: • Can all suppliers really be expected to meet the same standards? How could ABB monitor compliance? • If the local government won’t protect human rights, what should ABB do? • Gender discrimination is against ABB’s policy, but what about locations where women are not permitted to work in factories?5

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Exhibit 5.4 BT’s Statement about Stakeholder Engagement BT, a global leader in stakeholder engagement and investor relations, engages with different stakeholders in different ways. Here are some examples they provide. Customers • Consumer liaison panels • Surveys on quality of service and future expectations • Telecommunications advisory committees Employees • Annual employee survey • Relationships with trade unions • European Consultative Works Council Suppliers • Annual supplier satisfaction survey • Ethical trading forums with key suppliers and industry colleagues Shareholders • Developed the Investors section of the annual report following consultation with analysts specifically interested in the social and environmental performance of the company Community • Survey of stakeholders revealed that education should be a top priority for social investment of the firm. Source: http://www.btplc.com/Societyandenvironment/Socialand environmentreport/Stakeholderdialogue/Stakeholderengagement/ stakeholderengagement.htm (accessed September 14, 2004).

In 2001 ABB Ltd., a global power and automation technologies firm with suppliers around the globe, both published their first corporate social policy and addressed the moral dilemmas they faced by launching an ambitious stakeholder consultation that involved meetings between ABB managers/ workers and local representatives from thirty-four countries.6 Their objective in these extensive exercises was to design and implement an organizational social policy. Discussions focused on two areas:

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1. whether the social policy was sufficiently comprehensive and covered the important topics and issues, and 2. how to implement and monitor the social policy. In two rounds of stakeholder dialogues (second round dialogues included eleven countries of the initial thirty-four), the participants discussed the firm’s social policy statement consisting of thirteen principles, prioritized the focus on the list of principles, and highlighted the firm’s vulnerability relating to each. Measurement of the firm’s performance on social principles and lack of consistent indicators were frequently voiced concerns. Finally, the participants noted the need for clearly articulated objectives and targets for each principle, and the desirability of audited social reports. In its 2004 Sustainability Review, ABB was able to report a great deal of progress in implementing their social policy and stakeholder engagement processes. Sustainability dialogues were now occurring in forty-eight countries, up from the initial thirty-four. Corporate-level dialogues in 2004 resulted in some structural organizational changes to facilitate integration of social policies into operating procedures, a task force to examine women’s promotion issues, and a commitment to become a carbon dioxide-neutral company. Country-level sustainability dialogues focused on a variety of specific issues, including the business case for sustainability in the United Kingdom, community involvement and workplace safety and health in the United States, and ABB’s partnership with the United Way in Canada.7 Stakeholder Engagement for Large-Scale Social Problem-Solving Business organizations may need to collaborate to address big issues by leveraging the resources and capacities of multiple partners and to mutually learn from their experiments, successes, and failures. Often business organizations partner with governments and NGOs to address significantly complex issues within the domain of the environment and sustainable development. Some issues can be addressed solo, and often circumstances or competitive environment dictate an individual approach. Figure 5.4 frames a way of thinking about how and when organizations might choose or be forced to act alone and when they would benefit from working with others. Lone Ranger Strategies Lone ranger approaches make sense when organizations and their stakeholders take distinct paths pursuing independent goals without strong mutual

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CHAPTER 5 Figure 5.4

Model of Business Collaboration Weak common interests

Strong common interests

Low interdependence in accomplishing goal

Lone rangers

Technical/professional associations

High interdependence in accomplishing goal

Antagonistic stakeholders (management vs. labor)

Collaboration/partnership

Source: Logsdon 1991, pp. 23–37.

interests or when partners simply don’t exist. For example, in the 1980s, pharmaceutical company Merck developed a cure for river blindness and then sought partners to pay for and distribute the drug in remote parts of Africa and South America. However, no international groups or governments stepped forward, so Merck decided to go it alone. However, the lone ranger approach is sometimes based upon an inaccurate assessment when the parties fail to recognize their mutual interdependence or when they fail to understand the commonality of their goals. It is rarely the case that a lone ranger truly exists in a vacuum, without need of or reliance on other stakeholders. Antagonistic Strategies Antagonistic approaches to stakeholder relationships occur when problem-solving must be highly interdependent but the parties do not share common interests. For example, management and labor rely on one another heavily, but each party may have mutually exclusive interests when negotiating labor contracts. Collaboration between them would contribute to attainment of the overall goal, but alignment of their distinct interests is difficult. When stakeholders themselves are antagonistic to the firm, dialogue is essential. Without it, there is little hope of reaching mutually beneficial solutions when conflict is present. Consensus-building processes that result in joint decision making are indicated in these situations. Technical/Professional Association Memberships Memberships are appropriate for organizations where mutual interests with peers are significant, but their goals can be achieved independently.

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Because competition among businesses is fierce within industries, organizations can pursue the achievement of common goals without sacrificing competitive advantage. The coalition of pharmaceutical companies toward the eradication of AIDS in South Africa through professional association action is an example of this model. The association is an important source of benchmarking best practices for organizations whose interests align, whose motives for collaboration are weak, or who are highly competitive. Collaboration and Partnerships Collaboration and partnerships make sense when an organization is highly interdependent with the stakeholders with whom it shares a high level of mutual interest. Every player is seeking roughly the same goals for roughly the same reasons, and each has particular skills and resources to apply to the common problem. So it follows naturally that the players should get together and develop fruitful ways of working together. Collaboration is the mechanism for problem-solving when seeking to address global problems that exceed the capability of any single firm, government, or international organization. The UN Global Compact reports hundreds of collaborations and partnerships to achieve the Compact’s goals, and we will report on some of these in subsequent chapters. Multi-Stakeholder Dialogues In 1992 the UN hosted a conference in Brazil to address environmental and social problems of the world. One outcome of the summit was Agenda 21, a comprehensive plan for achieving a sustainable environment in the twentyfirst century. The UN Commission on Sustainable Development (CSD) was created to monitor progress on the agreements reached at the conference. The CSD has developed specific mechanisms of stakeholder involvement in order to create a forum for groups in the UN to discuss progress on these issues. They hold multi-stakeholder dialogues annually on emerging sustainability issues, and conduct ongoing multi-stakeholder processes via the Internet.8 Example: DestiNet for Sustainable Tourism One good illustration of multi-stakeholder problem-solving is reported by Ramboll, a Danish knowledge management firm, in partnership with Ecotrans e. V. (Germany), the European Union, and the European Environment Agency.

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Exhibit 5.5 AA1000—Guidelines for Stakeholder Engagement • Participating stakeholders help to identify other stakeholders. • Stakeholders help to define the terms of engagement (how, when, where, what’s on the agenda, who can speak, analytic processes, feedback mechanisms, etc.) • Company representatives in charge of stakeholder information are considered trustworthy inside and outside the firm. • Stakeholders are engaged in two-way dialogue. • Stakeholders are not penalized or disciplined for expressing their views. • “Venting” and “hygienic outbursts” are permitted and encouraged as a way to clear emotional blocks. • Uninformed stakeholders are heard, and then education is attempted. When the firm’s representatives are uninformed, they too seek to be educated. • Actual decision making is based on dialogue among informed and reasonable participants. • All parties are aware that if their views are acted upon, there will be consequences. • There is a public disclosure and feedback process to allow participants and others to assess and comment on the engagement process. Source: Adapted and extended from Institute for Social and Ethical AccountAbility, 1999a.

The partnership seeks to gain synergy from their individual efforts on environmental protection by jointly sponsoring and operating DestiNet (http:// destinet.ewindows.eu.org), a portal that provides information on sustainable tourism. Tips on resource management and links to related websites are available on DestiNet. The partners hope to optimize successes in developing and enhancing regulatory and voluntary actions that concern tourist destinations. Each partner has a focus and target for contribution to the initiative. For example, the European Environment Agency will ensure that the technologies employed meet the informational needs of users, perform continuous performance evaluation, and ensure that all contributors receive the technical assistance necessary to collaborate in the effort. Ramboll and Ecotrans coordinate efforts to ensure distribution of relevant and timely information, to encourage use of the portal, and to promote optimal website design.

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The upshot is that partners and their stakeholders benefit from easy access to best practices and up-to-date scientific findings to support their various decision-making requirements. Example: Biomedical Research for Tropical Diseases Novartis, a Swiss pharmaceutical company, has partnered with the government of Singapore and the World Health Organization to develop biomedical research for tropical diseases and to make treatments available and affordable in developing countries, initially focusing on dengue fever and treatment-resistant tuberculosis. The Novartis Institute for Tropical Diseases was established in January 2003, funded jointly by the partners. Most researchers will be local scientists from Singapore, with state-of-the-art biomedical research tools provided. Making Stakeholder Engagement Work Stakeholders can be identified, mapped, assessed, and engaged. The principle of corporate accountability makes these actions necessary for GBC firms. Exhibit 5.5 summarizes guidelines for designing meaningful stakeholder engagement. These guidelines can be used to establish ground rules for stakeholder engagement programs and also to evaluate the appropriateness of existing programs. Now we know which stakeholders to engage and what constitutes accountability to them. But . . . how do we keep them interested? In the next chapter we use cases to illustrate the principle of accountability and stakeholder engagement processes for a GBC company.

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CHAPTER 6

h6g

Cases in Implementing GBC Stakeholder Engagement —————— ————

We have explored the meaning of stakeholder accountability and the processes of stakeholder engagement. Now it’s time to turn our attention to a variety of cases of how companies have engaged their stakeholders. These are some of the crucial patterns that managers and companies exhibit when negotiating the tricky waters of culture conflicts, integrity management, crossborder variations in custom and law, and a host of other problems faced by multinationals in today’s global environment. In this chapter we begin with a framework for understanding GBC-oriented stakeholder engagement. The framework, shown in Table 6.1, combines the key patterns of stakeholder engagement and accountability with the four steps of the GBC process. Cases chosen from the Global Compact database, AccountAbility, and various other company sources are slotted into the framework to illustrate the relationships, and each case is presented and discussed. The cases discussed are a healthy variety—some are exemplary of GBC conduct, some are first attempts, and others raise questions about appropriate implementation techniques or about the alignment of identity, image, and reputation or mission, vision, values, strategy, structure, and process. Our research shows that companies find themselves in different places with regard to implementing GBC-based stakeholder engagement, and this is to be expected. There’s a great deal to be learned from their experiences. Implementing Stakeholder Engagement Most companies are naturally attuned to investors and customers as key stakeholders. Organizations are structured to be responsive to their needs and wants, and managers are likely to spend a great deal of their time thinking about

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Table 6.1 Stakeholder Engagement and Global Business Citizenship GBC Steps Stakeholder engagement

Code of Conduct

Supplier/ employee relations

HewlettPackard electronics ind. code

Local Adaptation

Conflicts and Experimentation Calcados Azaléia, Brazil: employee childcare

Community advisory panel

Holcim/Union Cement, Philippines: Community conflicts

Public-private partnerships

Volvo, Sweden: methane vehicles

Multi-sector collaboration

Systematic Learning

Vietnam Footwear: UN standards

AngloGold Ashanti and Danfoss: HIV in the workplace

Note: The GBC steps across the column headings are intended to represent a progression of actions toward becoming a global business citizen. The row headings, however, are not in progression but are discrete. Any or all of them could be present in a particular case.

those needs and wants. Of course, there’s more to think about—particularly employees, suppliers, local communities, governments, and non-governmental organizations (NGOs). “Stakeholder engagement,” you’ll recall, is much richer and deeper than “stakeholder management” or “managing stakeholder relations.” Engagement involves establishing and sustaining a long-term trusting relationship based on good listening, good interpretation, and good-faith responses. For GBC companies, engagement means achieving high-level stakeholder dialogue and learning how best to solve ordinary operational problems, cross-cultural differences, and code implementation issues in a sustainable way. Employee Stakeholder Engagement: Calcados Azaléia S/A, Brazil Managers don’t have to look far to find key stakeholders and to benefit from engaging them in long-term good relationships—think first about those who

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CHAPTER 6 do the work. Calcados Azaléia of Brazil did just that with its large and farflung employee base. Calcados Azaléia S/A is Brazil’s largest—and the world’s fifth largest— shoe manufacturer, with worldwide sales of its Azaléia, Dijean, Olympikus, and Asics brands. It takes a sizeable workforce—15,000 employees and another 4,000 contract workers—to make 150,000 pairs of shoes each day. In 1991, the company surveyed its workers to discover their needs and interests and to make good on its pledge to exercise social responsibility. Health, housing, transportation, education, and safety concerns surfaced— none of them surprising in a developing economy and an industry relying on semi-skilled labor. Among the company’s numerous responses to employee stakeholders’ concerns and the chosen focus of its initial Global Compact entry was the Centro de Educação Vocacional (Center of Vocational Education), an after-school child care and educational program for employees’ children aged 7–15. Parents participating in the program pay only for the children’s food and transportation. Children take classes, enjoy sports and other recreational activities, go on field trips, learn about different vocations and their training requirements, read, learn to use computers, and discuss topics of general importance. They receive dental, medical, and nutritional care and are encouraged to go on to high school. Calcados Azaléia reports a high level of satisfaction among parents whose children attend the Center. Recruitment and retention benefits have been magnified by improved productivity among employees who no longer worry about what their children are doing after school. Children themselves benefit from the tutoring, enrichment, and guidance. The company claims long-term benefits as well: By educating local children, the company is also better preparing the next generation of potential Azaléia employees. Participating children acquire greater knowledge, broaden their vision, develop a better awareness of what is going on outside their town, learn how to thrive in today’s world, as well as recognize the importance of their family, community and future.1

The payoffs seem likely to spread throughout the industry as Calcados Azaléia reaps recognition for its comprehensive programs for children of employees. The Center has been designated a model child care center in Brazil, and the company itself has earned “most admired” status among its peers. Stakeholder engagement does make a difference, and it’s not a bad idea to start learning first how to make the process work at home. Calcados Azaléia is only one of many companies worldwide that has chosen to treat its employees with the kind of respect that core stakeholders deserve.

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Supplier Engagement: Hewlett-Packard Those who supply resources, components, and services to the firm have historically been core stakeholders: the quality, value, timeliness, terms of payment, reliability, and other task-related attributes they bring to a relationship are important to a firm’s ability to meet its own commitments to its customers. These days, suppliers play an even more critical—and perhaps unexpected—role for global business. They require expanded attention because of the emergence of supply chain ethics as a new management concern. Outsourcing is now so commonplace among globalized companies that it hardly causes a ripple of attention anymore. Too often, though, problems are outsourced along with the cost-reduction opportunities. A firm may claim not to employ children, for example. But if that only means that the company has outsourced to contractors and subcontractors who do employ children, then the company is merely manipulating appearances to mask the truth. “One step removed” no longer means the same as “not responsible for.” The clothing industry has well-known exposure to many labor issues, including child labor, forced labor, excessive overtime, unsafe working conditions, and so on. Less visible but no less exposed is the computer industry, especially in the making of chips and hardware components. Hewlett-Packard (HP), in recognition of this problem, has developed and begun implementing a supplier code of conduct. In 2002, HP rolled out its Supply Chain Social and Environmental Responsibility (SER) Policy, which included its Supplier Code of Conduct. HP’s procurement expenses in 2003 were more than $52 billion, spread across thousands of suppliers, leaving the company with an extremely complex implementation task. And, as the company notes in its website discussion, suppliers have supply chains of their own, making compliance even more difficult. Where could the process of ensuring compliance begin? HP chose to start with its 50 top suppliers, accounting for 70 percent of expenditures, plus another 100 “high priority” suppliers that were added in 2004. The near-term goal was to incorporate the Supplier Code into all product materials procurement contracts by the end of 2005. Key features of HP’s Supplier Code of Conduct follow: Environment Suppliers must have environmental policies that cover energy efficiency, hazardous materials, information and labeling, manufacturing, packaging and product recycling and reuse. The code incorporates our General

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CHAPTER 6 Specification for Environment (GSE), which specifies restrictions on materials that may be used in our products. Health and safety Suppliers must meet health and safety requirements that include evaluating and controlling exposure to chemical, biological and physical risks, machine safeguards, occupational injury reporting, training and workplace ergonomics. Human rights and labor practices Suppliers must treat employees fairly and in accordance with local laws. They must not use forced, bonded, involuntary prison or child labor. They must provide wages and benefits that meet or exceed legal requirements and respect the rights of workers to associate freely, in accordance with local laws and established practice.2

HP’s Supplier Code has now gone through several iterations, and HP is taking steps to implement the code, to monitor supplier compliance, and to work with suppliers who are attempting to meet the standards. HP largely relies on supplier sign-offs and self-monitoring, but it also conducts site visits and audits, and works with suppliers to achieve compliance. In 2003, because of HP’s industry leadership in setting up the first supplier code, several NGOs asked HP to do more. Soon after, early in 2004, a blistering report was issued by the Catholic Agency for Overseas Development (CAFOD), a nonprofit agency based in the United Kingdom. The report cited extensive labor, health & safety, and environmental standards violations in the overseas factories of the largest computer manufacturers, including IBM, Dell, and Hewlett-Packard. What follows is a brief excerpt from CAFOD’s report, titled “Clean Up Your Computer!” which called on computer users to lobby manufacturers for justice in global trade practices: • Low pay—in China, workers are paid well below the minimum wage of £30 a month. They have to do illegal amounts of overtime to earn enough to live on. • Insecurity—workers are kept on short-term contracts of 28 days. They can be hired and fired easily. They can’t get social security benefits like food vouchers, maternity leave, holidays or pension.

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• Humiliation and harassment—to get a job some workers go through intrusive tests and are forced to take a pregnancy test. Workers who are pregnant, belong to a Trade Union or are homosexual might be refused work. In one factory in China, workers who made a mistake must wear a red overcoat.3 Amid widespread circulation of this report, IBM’s response was to stiffly assert that it complied fully with local laws and regulations, and Dell professed ignorance but thanked CAFOD for bringing the problems to its attention. Hewlett-Packard, however, decided that the time was ripe to push for industry-wide standards to promote human rights, health and safety, and environmental protection around the globe. On October 21, 2004, a joint press release announced the Electronics Industry Code of Conduct, sponsored by HP, IBM, Dell, and several of their leading suppliers. The purpose of the code and its availability for adoption by others are noted in the press statement: The code, which was developed in collaboration with electronics manufacturing companies Celestica, Flextronics, Jabil, Sanmina SCI, and Solectron, paves the way for a standards-based approach for monitoring suppliers’ performance across several areas of social responsibility, including labor and employment practices, health and safety, ethics, and protection of the environment. Prior to the release of this Code of Conduct, the companies used their own respective codes of conduct, and suppliers were subject to multiple, independent vendor audits based on different criteria. HP facilitated this collaboration for the adoption of a single, global Electronics Industry Code of Conduct. The code reflects the participating companies’ commitment to leadership in the area of corporate social responsibility and will potentially reduce inefficiency and duplication, and make performance easier to audit and verify. . . . The code may be voluntarily adopted by any business in the electronics sector and subsequently applied by that business to its suppliers. The participating companies invite other companies to review and adopt the code, the text of which is available upon request and at each company’s website. Businesses interested in adopting the code may contact HP: http:// www.hp.com/hpinfo/globalcitizenship/environment/pdf/supcode.pdf.4

Only time will tell if the voluntary industry-wide supplier code of conduct will do the job of convincing suppliers that human rights and environmental protection are important. But it seems clear that HP, consistent with its long

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CHAPTER 6 history of social responsibility initiatives, intends to carry this ball across the goal line. Local Community Engagement: Holcim and Union Cement Communities form the social and governmental contexts in which a company’s various units operate. It can be tempting to take advantage of local communities by externalizing costs on them, especially when the government is weak or corrupt. But with a bit of care and attention, local communities can join the ranks of a firm’s best allies. The Holcim Group, a Swiss-based multinational company, learned this lesson from its 1998 acquisition of Alsons Cement in the Philippines. Cement is one of the leading export products of the Philippine economy, and Holcim is one of the world’s leading producers of cement. With 48,000 employees and 2003 revenues of more than 12 billion Swiss Francs, Holcim’s mission is “to be the world’s most respected and attractive company in our industry—creating value for all our stakeholders.”5 But the Philippines presents some difficult challenges for accomplishing such a mission. The economy is a combination of agriculture (sugar, bananas, coffee, tobacco, sugar cane) and heavy industry (cigarettes, steel, cement) that relies on exporting for growth. Freed from the corrupt regime of Ferdinand Marcos in 1986, the country has since been burdened with labor strife, political intrigue, riots and rebellions, separatist movements, terrorism, and violent religious conflicts. Union Cement, the Philippines’ largest cement maker, was formed by a merger of three cement companies in 2000, joined two years later by a fourth.6 The company employs 1,400 people and produces nearly ten million metric tons of cement annually, much of it for export. One of the former companies, Alsons Cement, had a long-standing poor reputation in its communities for its history of social and environmental neglect. Holcim had acquired a controlling interest in Alsons prior to the formation of Union Cement, and as part of the cultural turnaround that mergers and acquisitions generally require, managers began to pay attention to community issues. In 1999, the Alsons community was devastated by flood, and the company describes its response: Alsons’ employees volunteered assistance in food, medicine, infrastructure repair and emotional support for the victims, and in doing so opened the door to improved relations. As a result, a community relations committee was created, made up of the company management, unions, local community representatives, NGOs and government agencies. This

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committee assesses and validates Alsons’ proposals for community activities, which have themselves been identified through a local stakeholder engagement process. Projects are then carried out in collaboration with partner organizations.7

For many companies, community advisory panels (CAPs) are proving to be powerful vehicles of stakeholder engagement. In the case of Holcim/ Alsons/Union, the CAP includes neighbors, managers, NGO representatives, and government officials. This broad representation of stakeholders has paid off in smoothing the path toward multisector collaborations to develop sustainable income capacity among workers’ families, to send poor children to school via scholarships, to augment educational quality by “adopting” schools, to provide potable water for neighborhoods, to help build affordable housing, and much more. Union Cement has an extensive social responsibility statement with the following as the kick-off message: Our Corporate Social Responsibility (CSR) policy articulates our commitment to working with all our stakeholders, building and maintaining relationships of mutual respect and trust, and contributing to improving the quality of life of our workforce, their families, and the communities around our operations.8

And it’s not just so many words on the website; Union’s programs and community involvements are real, ongoing, and valuable in unforeseen ways. Political, social, military, and religious strife continues in the Philippines with no sign of abating. According to the CSR coordinator and communications manager: At the Lugait plant, security concerns are high due to the presence of rebel groups in the area. But if you are responsible and open to discussion then your community can actually become your first line of defence. In fact, our security guard numbers have not increased but on the contrary they have reduced to about 20% over the last three years—primarily because we have improved our relationship with the community and we know that they will help “protect” us.9

Recall from the stakeholder salience model of chapter 5 that powerless or illegitimate stakeholders can move onto the managers’ radar screen by forming coalitions with dominant stakeholders who already have legitimate standing and power to influence the firm. The good news of the Holcim/Union

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CHAPTER 6 case is that companies can do the same, building stronger barriers against unexpected threats from the external environment. Public-Private Partnerships: Volvo and Göteborg Methane gas is a polluting emission of gasoline-burning vehicles. Ironically, however, when harnessed as a fuel instead of emitted as a waste, methane burns more efficiently than gasoline at very little cost in vehicle performance. Methane gas occurs naturally in coal beds, and it can be produced from organic waste, especially manure. Architect William McDonough makes a compelling argument that the environmental impacts of business will not be dramatically improved until businesses begin to think about design issues from the ground up—not only in manufacturing processes and waste recycling, but in the design of products themselves. 10 AB Volvo Group, headquartered in Göteborg, Sweden, has initiated an experimental public-private partnership to buffer the enormous risks of radical design innovation in the use of methane-powered vehicles. Natural gas, liquid or compressed, has been used sporadically as a vehicle fuel since the early 1900s, but Volvo was the first company to market a passenger car for methane gas use. Volvo introduced its first methane-burning vehicle, the Volvo 850 Bi-Fuel, in 1996. Remarkably, the car met California’s stringent emissions standards for the year 2000. Göteborg, a port city of a half million people in a nation of less than nine million, is a leader in experiments with “green procurement” and environmental impact reduction. Many buses, garbage trucks, light-duty trucks, ambulances, police cars, and passenger vehicles in the city’s fleet are now equipped with methane/gasoline, electric hybrid, or hydrogen-powered engines, cutting greenhouse gas emissions by a significant amount. Volvo describes its methane partnership with the Göteborg region as follows: Its goal is to improve air quality in the Göteborg area. By working cooperatively with partners such as the Business Region Göteborg, Fordons Gas, Göteborg Energi and Renova [the area’s municipal waste management facility], the project has given rise to new products, new infrastructure and government incentives to promote the use of environmentally friendly methane-fueled vehicles. Examples of promotion of gas-driven vehicles are two hours free parking permission for environmentally friendly cars, taxi lanes with priority for environmental taxis at strategic places (Central train station etc) and company car tax reductions for environmentally friendly cars. The project has also initiated several activities to stimulate the tax system to help promote gas-driven vehicles nationally.11

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Initial results are impressive. Volvo reports that In January 2002, 67 buses, 48 trucks >3.5 tons, 21 trucks